Farmers will tell you that “rain makes grain.” That often holds unless the rain is accompanied by winter-like temperatures during the planting season in the key growing areas within the US. As of May 13, the USDA reports that 29% of the corn crop has been planted as opposed to 85% last year. For soybeans, 6% of the crop is in the ground whereas 44% is the norm. A late planting makes the crops statistically vulnerable to late-season frosts and freezes. Coming off a historic year off skyrocketing prices and volatility due to a drought and supply constraints, one would think prices be reflecting the concerning delay in plantings. However, we are not seeing it so far.
There could be various reasons. For one, the market obviously has faith that the farmers will get the crop in the ground before the shrinking window of time closes. With tractors that can operate 48 row planters, it is likely the crops get planted. Furthermore, the rain and snow that has fallen since last years has shrunk the drought-affected areas. Also, the US dollar appears to be poised to test the highs of 2012 and beyond. Any significant move higher is sure to dampen grain exports. Lastly, open interest is down quite a bit from last year at this time. The funds seem less excited to place big bets on this year’s crop as opposed to the past several years. Soybeans crossed below their 200-day moving average in November and have not come close to it since. Corn decisively abandoned the 200-day MA after the March 28 planting projections showed the potential for a whopping crop. And wheat has only spent 2 trading days above the old school bull/bear benchmark this year.
Grain bulls are not alone. Gold bugs are licking their wounds from a 2-day 15% crash in April. This unprecedented $230 trading range within 2 trading days was truly amazing, especially considering that the gold market traded within the same size range between 1982 and 2005 (23 Years!). The extreme move caused a ripple effect in commodities as well as stocks. Oil tanked $7 and the S&P over 50 points. Both markets snapped back within days. Now the equity markets are melting up, disconnecting from commodities as they run to new all-time highs on what has been almost a daily basis. QE appears to be causing this explosive move in stocks but less so in commodities as there are continued global economic concerns. Commodity expert Julian Jessop said “industrial commodities are more sensitive to near-term economic prospects (which remain poor), equities are a closer substitute for bonds in investor portfolios, and the demand and supply responses to rising commodity prices limit their upside. The divergence between commodity and stock markets is more likely to be closed by falls in equity prices, as valuations become too stretched and risk appetite wanes again.”
Is the “commodity collapse” going to continue? Reality check seems more fitting. The volatility and extreme high prices commodities have seen over the past several years was due to a confluence of events and it is questionable if the markets even belonged at those lofty levels in the first place. Investors over weighted in commodities, resource hungry countries, and tight supplies created the perfect storm for irrational exuberance in the commodity space. As countries like China slow down and supplies of commodities rejuvenate, reality starts to sink in. Markets have a tendency to revert to the mean and it appears that is where these markets are headed.
Many CTAs reaped the benefits of exploding commodity prices. However, times have been more challenging since the bull market of the past couple years has died. Managers are facing markets with extended periods of inaction and choppiness and then periodically getting jolted by insanity. More than ever, it is important to examine CTA performance, particularly in times of market stress. CTA performance for the month of April would be a perfect example to see how managers handled the schizophrenic markets and adapted to a rapidly changing and challenging series of events. If you would like some assistance selecting Commodity Trading Advisors to add to your portfolio, please feel free to contact us. For questions regarding this article, a specific CTA or Managed Futures in general, please feel free to contact me by phone (410) 713-4830 or email me.