January 23, 2018
Close Jan 23
1 week change
US $ Index
US 10 Year Notes
Grain prices were firmer over the past week, on concerns about Argentina weather. Soymeal has been the largest gainer lately, although soybeans also gained 40 cents in 6 trading days. Argentina is the world’s largest soymeal exporter, due to their huge export tax on raw soybeans.
Also contributing to the higher prices is the fact large speculative funds are short a record number of crop futures. The total of 480,500 contracts exceeds the previous record set in April, 2017. A decent rally started then, especially in wheat futures, which was the market they were the shortest back then.
These traders use sophisticated techniques, but are usually trend followers. So if trends and moving averages start to turn up, they will buy to limit any losses. If a few start to buy, it can easily lead to more buying from that source.
Grains are maybe play a little catch-up to some of the other major commodities, which are starting to do much better. Crude oil is up 54 percent in the past 7 months. Gold has rallied over $100.00 per ounce since December. Markets as diverse as copper, cotton and lumber are also showing large gains lately.
These have all helped the Goldman Sachs Commodity Index to trade at its best level since July, 2015. However, the index is still worth less than half of where it was trading prior to the economic meltdown in 2008/09. Perhaps this means further gains are still possible? A pickup in grain prices would obviously help.
There is more and more talk that interest rates are likely to rise further. The stronger commodity prices will eventually cause higher inflation. US 10 year notes are trading at 2.66 percent, which is the highest since July, 2011. In the longer term picture, however, 2.66 percent is still very low for 10 year money.
Despite the lower US dollar index and strong crude oil, the Canadian dollar can’t muster much of a rally. Some say this has to do with the tough NAFTA negotiations, but some economists think scrapping or renegotiating NAFTA would actually be positive for Canada. For sure a lot of auto production has moved to Mexico under that trade deal.
Despite the factors which should be affecting our dollar positively, Canada needs a weaker dollar to compete, especially with the US. Trump is cutting corporate and personal income taxes in a big way, while taxes on this side of the border have gone up considerably under our governments. Comparing gas and diesel prices between the 2 countries is but one good example.
As always, these are the opinions of the author, and not necessarily those of Hensall Co-op. ♦
- Frank Backx, Hensall Co-op Grain Marketer