Commodities Weekly Research and Analysis

May 10, 2008

The last week of trading was largely dominated by the grains and the energy commodities. Crude oil continues to make record highs, while supplies continue to tighten for corn and soybeans.

It has been known for quite a while that supplies are very tight for corn and soybeans, but the weather will be the dominating factor throughout the next few months.

Crude oil futures are benefiting from additional investment as an inflation hedge and the ever-increasing turmoil in the oil producing countries has kept a very strong floor under the energy commodities.

The latest economic numbers are painting a less dire picture of the US economy. The stock market has rallied over the last couple of months on ideas the recession won’t be as deep as earlier feared. I can’t say I fully buy into this thinking, but it is possible. However, a rebounding economy would only accelerate the trend in inflation and commodities.

Some commodities have been drifting lower in the last couple months while others have moved strongly higher. It looks like the weaker commodities are near bottoms and will begin another rally and the stronger commodities could accelerate much higher.

Grains: The monthly USDA crop report released on Friday provided very bullish numbers for soybean futures. Ending stocks for soybeans are critically tight and there is no room for error this growing season. A soybean crop that suffers yield losses this season will put this market in a rationing mode. That will likely cause a parabolic move higher in soybeans.

Corn futures are in the same situation as soybeans. The weather is not getting off to a good start and it is looking more and more like target yields may not be possible this season. Wet and cool weather has farmers far behind schedule this year, which typically means that yields will be lower. The weekly USDA Crop Progress report will be out Monday afternoon. Corn crops are usually 75 percent planted this time of year – the report is expected to show about 50 percent completed thus far.

Rice futures are still trading erratically. Prices have bounced back after a sharp sell-off a couple weeks ago. I wouldn’t rush in to buy this market unless new highs can be made. There is not much supportive news for wheat futures right now. The market has just been drifting lower. It is due for a bounce, but I can’t get too excited here.