Commodities Enter Bull Market After Drought Damages Crops

Date: Wednesday, August 22, 2012
Author: Whitney McFerron and Joe Richter, Bloomberg

Commodities entered a bull market, gaining 21 percent from a June low, as grain prices surged after the most severe U.S. drought in half a century and as crude oil rallied amid increased tension in the Middle East.

The Standard & Poor’s GSCI Spot Index of 24 raw materials rose 0.9 percent to end at 675.55 yesterday in New York. The gauge has jumped from this year’s lowest close of 559 on June 21. A gain of more than 20 percent is the common definition of a bull market. Crude accounts for more than 50 percent of index.

Soybeans rose to a record yesterday, and corn soared 66 percent since mid-June. The U.S. Department of Agriculture has declared almost 1,600 counties in 32 states as natural-disaster areas after the drought seared millions of acres of cropland.

“There have been weather-related supply disruptions, and as long as you have any type of global growth, you’re going to have increased demand for grains,” said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “Given that the U.S. is the bread basket for grains, that’s going to have a significant impact.”

Soybeans and grains have led advances this year in the GSCI measure. As of yesterday, the oilseed jumped 43 percent in 2012, wheat in Chicago climbed 41 percent, and corn was up 30 percent.

Through yesterday, the commodity gauge gained 4.8 percent in 2012, while the MSCI All-Country World Index of equities climbed 9 percent and the dollar was up 2.1 percent against a basket of major currencies. Treasuries returned 1.3 percent, a Bank of America Corp. index shows.

Mideast Tension

Crude has rallied since late June on speculation that Israel may strike Iran to delay its nuclear program, and on concern that fighting in Syria may draw in neighboring states in a region that supplies about a third of the world’s oil. Yesterday, futures in New York climbed to a three-month high on speculation that euro-area leaders will make progress in resolving the region’s debt crisis this week.

Front-month futures ended at $96.68 a barrel on the New York Mercantile Exchange yesterday, 24 percent higher than the year’s lowest close on June 28. Brent oil in London is on course for the eighth weekly gain in the past nine.

Commodities, which traded little changed at 674.87 at 11:37 a.m. in Singapore, have rallied on speculation that the economies in China and the U.S. will rebound.

Chinese Premier Wen Jiabao said that there’s “growing room for monetary policy operation” amid easing inflation, state television said Aug. 15. Confidence among U.S. consumers improved in August, and an index of leading indicators climbed more than forecast in July, separate reports showed on Aug. 17. China is the biggest consumer of everything from copper to pork, and the U.S. is the largest user of crude oil and corn.

Food Prices

The jump in grains and oilseeds sent world food prices up 6.2 percent in July, the biggest increase since November 2009, the United Nations Food & Agriculture Organization said on Aug. 9. The gauge, which tracks 55 food items, slid 7 percent in the previous three months on the outlook for bumper world harvests and ample dairy and meat supplies.

In mid-June, Goldman Sachs Group Inc. moved to a “near- term overweight” recommendation in commodities. On Aug. 10, the bank maintained forecasts for a rally in corn to $9 a bushel in three months, adding that soybeans may climb to $20 a bushel, while wheat may reach $9.80 a bushel.

Yesterday, soybean futures for November delivery rose 2.9 percent to settle at $17.325 on the Chicago Board of Trade, after reaching an all-time high of $17.34.

Corn’s Record

Corn for December delivery jumped 1.8 percent to $8.3875 in Chicago. The price earlier reached $8.40, the highest since rallying to a record $8.49 on Aug. 10.

Wheat futures for December delivery advanced 2.1 percent to $9.22 in Chicago. The price increased for five straight sessions and was up 47 percent since June 15.

“We expect soybean prices to outperform to ration resilient export demand in the face of critically low U.S. supplies, corn prices to rally to secure sufficient ethanol demand destruction, and wheat prices to underperform corn prices on relatively higher supplies,” Goldman analyst Damien Courvalin wrote in the Aug. 10 report.

U.S. corn production may drop to 10.78 billion bushels, a six-year low, while the soybean harvest at 2.69 billion bushels would be the smallest since 2007, the USDA said on Aug. 10. Crops are in the worst condition since 1988, a year when the corn harvest tumbled by 31 percent because of drought.

“The grains have been the strongest-performing subsector in commodities the past few months, and that has purely been driven by supply-side considerations and the U.S. drought in particular,” said Sudakshina Unnikrishnan, a London-based analyst at Barclays Plc.

In the week ended Aug. 14, hedge funds held wagers on a rally across 18 U.S. futures and options contracts near the highest in 11 months, according to the most-recent U.S. Commodity Futures Trading Commission data. A measure of 11 U.S. farm goods showed speculators’ bullish bets in agricultural commodities rose 0.6 percent.

Cocoa, gasoline, silver, gold and cattle also have posted gains this year.

To contact the reporters on this story: Whitney McFerron in London at wmcferron1@bloomberg.net; Joe Richter in New York at jrichter1@bloomberg.net