By Elaine Kub
DTN Contributing Analyst
The grain markets have been in need of some excitement, and they're finally getting it this week. It's not unusual or inappropriate that corn would experience a period of low volatility while there is still not much seed in the ground (Texas' corn was 8% planted as of Sunday evening). No plants are growing yet, so why should fundamental excitement grow on traders' computer screens? Even winter wheat, which is still mostly dormant after an unusually cold and persistent winter, needs to be looking for outside influence more than its own fundamental factors right now.
And outside influence it has received! As DTN's Senior Analyst Darin Newsom explained in his Tuesday column, sometimes a little bullish volatility in the grain markets comes from a source that is blessedly unrelated to any domestic grain production disasters here at home. America's farmers may watch with schadenfreude as Ukraine's grain producers and exporters experience chaos and misfortune, driving up grain futures prices for the rest of the globe. The recent double-digit gains in corn, wheat and soybeans can largely be explained by traders' uncertainty about how well or how much grain Ukraine will be able to stage for international exports in coming months.
But the grain markets aren't alone. Rising natural gas and crude oil prices can also easily be linked to that geopolitical uncertainty in a region that exports major portions of the world's energy. Even without whatever gains have been driven by the Ukrainian situation lately, it was already one of the year's biggest surprises to see commodities -- as a group -- move significantly higher through the first two months of the year.
At the end of 2013, investors generally had a consensus that the American economy would steadily improve through 2014, the U.S. dollar index would climb, and commodities would enter a bearish phase. Correspondingly, they had trimmed their participation in most commodity futures markets. So to see such wild and widespread gains in commodities during January and February may have caught many fund traders off guard and scrambling to identify the next big market story.
The Standard & Poor's GSCI, which indexes commodity futures as a whole sector, has risen 4.47% already in the first two months of 2014 alone. But it's interesting to drill down and see which individual commodity markets have had the most astonishing performances and how investor money has flowed into those markets. Grain market participants may not ordinarily spend a lot of time thinking about copper or cocoa, but noting how quickly speculators' interest can be piqued, we might guess at some potential scenarios for grains.
In order of their year-to-date gains, here are some outside commodity markets that have managed to grow investors' interest:
COFFEE: Up 76% since the 2014 calendar year began.
At the very end of last year, coffee futures prices were trading at about $1.10 per pound. The most recent high on the nearby contract was almost $1.95 per pound -- a truly incredible rally. This was the most appropriate market to respond to the drought in Brazil, given the specific regions it has affected, and the timing of coffee's rally confirms that traders were paying attention as the drought intensified. Coffee has definitely demonstrated that when there is a real fundamental concern about production, yes, investors are willing to pile into a commodity market.
OATS: Up 55.4%.
Oats, the neglected stepchild of the grain markets with less than 1% of the volume of futures trading typically seen in corn, started 2014 at $3.54 per bushel -- a pretty reasonable price for oats. Now the futures price is above $5.50. It wasn't a huge amount of futures trading activity that has led to that price change -- investors' net-long position is actually lower now than it was at the end of last year, and commercial hedgers are still net short. So this market demonstrates that futures prices can respond to a fundamental price problem even without a massive amount of participation by speculators. More importantly, it also demonstrates the importance of being able to get a physical commodity to the physical location where it's needed. Oats' rally is ostensibly driven by a lack of freight availability in Canada, not by any overall shortage of the grain itself. In this timeframe when global grain exporters are worried about their access to Ukraine's physical grain supplies, let this be a lesson not to underestimate the ability of a market to panic.
LEAN HOGS: The April contract has risen 23% so far in 2014.
These are absolutely record highs for the hog market -- the June contract sailed above $117 per hundredweight on Tuesday. Speculators' net-long position has risen 60% through the past two months as the market has gained understanding of the effects of the PED virus on the continent's hog supply. So again, a fundamental supply concern has received a serious and justified response from investors.
WHEAT: The HRW chart has risen 14.5%; the HRS chart has risen 12.8%; the SRW chart has risen 5.7%.
As wheat prices have rallied through the first two months of 2014, total open interest in the futures markets actually dropped 20%, perhaps as speculators were abandoning previously established short positions. Managed money's net-long position has grown almost four-fold since the end of the year.
LIVE CATTLE: Up 13.6%.
Speculators have piled into this livestock market, too, as supply concerns have been verified. Speculators' net-long position in live cattle futures has grown 32% since the end of the year.
CORN: Up 13.2%.
Total open interest in corn futures dropped through late February, but a major structural change occurred in investors' positions -- as a group, they went from being net short 94,812 contracts on Dec. 31 to now being net long 94,812 contracts. This leaves corn prices relatively more vulnerable to a sell-off if commodity investing starts to lose its appeal in ensuing months. But we could just as easily see increased speculative buying if fundamental concerns support that.
COCOA: Up 12.8%.
Not much has changed here, structurally -- investors' net-long position has only grown 6% since the end of the year.
SOYBEANS: Up 12.8%.
Total open interest in soybean futures mostly grew during February, but some cashing out has been seen in recent days. Remember that even the most exciting fundamental speculator-attracting story line will eventually run out of new speculators to attract.
GOLD: Up 12.6%. (Silver has gained 13.8% and copper has lost 6.7%)
Gold's 2014 highs so far have coincided with the geopolitical drama between Ukraine and Russia, but as that subsides, metals would be susceptible to losing favor again.
NATURAL GAS: Up 10% (Crude oil is also up 10% for the year so far).
At one point this year (the Feb. 24 high), natural gas prices had actually gained 53.5% over their Dec. 31, 2013, price level, but things have calmed down since the worst of the cold weather has passed. Interestingly, total open interest in natural gas futures actually fell throughout that timeframe of price spikes. Perhaps a market can get too volatile to even be attractive to investors?
SUGAR: Up 9.6%.
Here again, a major structural change has occurred through the past two months, with speculators going from a large net-short position to a nearly equally sized net-long position now.
COTTON: Up 5.1%.
The speculative net-long position in cotton futures has grown 22% over the past two months, but this market just doesn't have the same kinds of fundamental supply concerns that some of the other commodity markets do.
So, if fundamental stories are what it takes to bring in the investor money (and particularly the investor buying interest), then the grain markets may have some luck building seasonal gains through spring 2014 as the plants themselves start growing and the markets start growing some excitement.
Elaine Kub is the author of 'Mastering the Grain Markets' and can be reached at email@example.com.
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