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The Bullish Case for Commodities in 2018

This winter, two big questions came up at almost every seminar where I spoke: 1: Will 2018 be just like last year? 2: Do we have any chance for better grain prices? 

My answer for the first question will help explain why you will like my answer for the second question. 

When I do my early morning update each day, I look very closely at three major outside market factors. I can already see that they are very different from last year.

The first factor is crude oil prices: What is the direction of the global crude oil market?

The second factor is equities: What is the trend of the U.S. and global equity markets?

The third factor is the dollar: What direction is the U.S. dollar going? 

nymex-crude-oil-monthly

This long-term monthly price of crude oil shows the major low in 2004 and 2005. Crude oil was trading at $35 to $42 per barrel, and corn was trading at $2.50 to $3.50 per bushel. Crude oil exploded up to $144 in June 2008. After that all-time high, prices fell to the major low at $26 in January 2016. Crude oil is now in an uptrend and has support at $56 and resistance at $70. Corn seems very undervalued when you look at the current price of crude oil.

I look at each of these factors every day and see they have changed from last year. In fact, compared to March 2017, these three factors are all bullish for the commodity markets. Let’s look at them one by one.

Crude oil. Last March, the crude oil market was at about $50 per barrel and going down. The ultimate low was $42 in June 2017. Now, crude oil is over $60 per barrel and is trending higher. This is positive for gasoline and ethanol prices. When crude oil is trending higher, it is positive for the entire commodity complex. 

Equities. The U.S. and global stock market continues to climb higher.  In March 2017, the Dow stock market index was at about 21,000. Even though prices have pulled back recently, the Dow and most of the global equity markets are 21% to 23% higher. The strength in the U.S. and global stock markets shows an economy that is hitting on all eight cylinders. GDP is moving higher around the world, employment and wages are increasing, and the demand for protein is surging as more and more people move into the middle class. 

The dollar. The U.S. dollar hit a major high at 103 in January 2017. In March 2017, the dollar was trending lower and trading at just over 101. Today, the dollar is trading below 89. The U.S. dollar is down 13% since March 2017. Since corn and soybean prices are about unchanged from last year, U.S. corn and soybean prices are on sale if you are a foreign buyer. The global buyers are buying at a 13% discount. 

monthly-dow-jones-index

This long-term monthly chart of the Dow Jones Index shows the major low at just below 7,000 during the financial crisis in December 2008. Since then, prices have been moving higher for over nine years and have increased over 300% since that major low. Prices appear to be overvalued, but I thought that a year ago! The rally in the U.S. and global stock market reflects strong economic growth. Historically, that is positive for commodity demand and eventually commodity prices.

Those are the three big factors and how they have changed. That brings us to the second big question: Can prices improve?

My short answer: Yes. The three outside market factors are all positive for demand for U.S. meat and grain exports. This helps explain why even with record corn and soybean crops in 2017, the corn and soybean markets were able to hold above the 2016 lows.  

To really create a bull market, you need to take U.S. yields lower in 2018. 

I am currently using a projected national corn yield of 173 bushels per acre and 48½ bushels per acre for soybeans. Watch the yield and acreage reports from the USDA later this month. If any weather problems develop in the U.S. that take the corn yield below 170 and the soybean yield below 47, then it is off to the races. 

us-dollar-monthly

This long-term monthly chart of the U.S. dollar shows the major low and double bottom at 75 in 2008 and 2011. After the low in 2011, the dollar rallied to just over 101 in January 2017. Since then, the dollar has been trending lower. At this time, the U.S. dollar is at the lowest price since 2014. The U.S. dollar is down about 13% since the major high in January 2017. This is very positive for U.S. exports of meat and grain. 

Final thoughts. Each week I post the U.S. Drought Monitor Index on my website. This is something grain traders around the world are watching, and it sure looks different than a year ago. 

This U.S. map shows two big areas of concern.

  • The first area is the Southern Plains and the dry conditions that go all the way from Texas to southern Illinois and up to Des Moines, Iowa.
  • The second area is in eastern Montana, all of the Dakotas, into southern Minnesota, and northern Iowa. 

Historically, a lot of late March rains can begin to fix the dry subsoil conditions. If they don’t do their job, then it is going to be an interesting year. 

NOTE: Trading of futures and options has substantial financial risk of loss and is not for all investors.

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