June 12, 2009
Commodities have made sharp gains over the last couple months, but it looks like a correction is coming. Soybeans, cocoa and crude oil have been the leading markets on the move higher and we may have started to see signs of a correction on Friday. A declining dollar, large investor inflows into commodity index funds and longer-term inflation fears have been the impetus for the commodities rally. Those factors should support commodities into the future, but they might have moved too far in the short term.
The demand side of the equation for commodities still looks a bit questionable. The stock market has been rallying partly on expectations that the economy will recover sooner than expected. The economic numbers may not be getting worse, but there is certainly no sign of an upswing yet. I also see a modest recovery at best in the U.S. over the next couple years.
China is another story. Industrial output has increased sharply in China recently and that will be very good for commodities going forward. Look no further than the price action in copper to see what the future holds for commodities due to China.
Grains: Extremely tight supplies of soybeans have pushed futures prices to the $13 level for July soybeans. However, there was a sharp reversal late in the week that could at least be a short-term top in July soybeans. With the tight inventories, traders are on edge of any weather problems this year. There is still solid upside potential in the November contract if any weather problems develop or the USDA tightens the ending stocks figures. For now, the market looks extended.
Corn is along for the ride with soybeans, but should have lower percentage swings than soybeans. Wheat has dropped significantly in the last couple weeks. The supply situation is not as favorable as soybeans and corn, but there may be some long term upside potential. This is also the time of year where wheat tends to make a seasonal low as harvest bring in new supply.
