March 29, 2024

Commodity Insight: Amazed, bewildered by markets

This is my week to vent — to express amazement and bewilderment toward a number of markets and how they have been performing in recent days.

In some cases, I understand what is motivating the markets and prices. In other cases, I am appalled at what is unfolding. But I also accept the abstract idea, it is what it is.

The Cattle Market

This week, boxed beef prices rose to new all-time highs and up to levels never before seen. Boxed beef is nothing more than various cuts of beef put in boxes for shipping from a packer and packing plant to retailers such as grocery stores.

In the period of November 2014 to the spring 2015, cattle futures and cash cattle traded $168 to $172, respectively. But this week, as boxed beef prices rose to new record-high prices, cattle futures traded under $85 and cash cattle no better than $95 to $100.

In other words, in today’s marketplace, the packer is buying cattle on the cheap, but selling beef at record-high levels. Thus, a huge amount of money is being made in the cattle industry, but by the packers, not cattle ranchers.

Never have I witnessed such a lopsided scenario. But it is what it is.

The Stock Market Vs. Commodity Markets

Stocks as measured by the Dow Jones collapsed until about a month ago. Since then, the Dow has rallied more than 6,000 points and is up 35% in April, the best monthly performance in 82 years and down 16% from the all-time high point set in early February.

And not a day goes by without traders on Wall Street wringing their collective hands about how poorly stocks are doing, showing a 16% loss for the year.

However, the CRB index, which is to the commodity markets as the Dow Jones is to the stock market, is 42% lower for this calendar year. The CRB index is weighted towards 19 commodities: aluminum, cocoa, coffee, copper, corn, cotton, crude oil, gold, heating oil, lean hogs, live cattle, natural gas, nickel, orange juice, reformulated blendstock for oxygenate blending gasoline, silver, soybeans, sugar and wheat.

The bottom line with commodities is clear: They are doing far worse than stocks, equities, the Dow and so forth.

It is those who produce commodities of all kinds that are justified in wringing their collective hands about the markets, not the traders on Wall Street. But it is what it is.

Crude oil And Corn Prices

The CRB Index has been slammed so hard this month it is back down to levels not seen since late 1999 to early 2002. One of the main fundamental reasons the CRB is dropping so sharply is because of crude oil.

An old saying in the world of hard asset markets is, “as crude goes, so go commodities,” and that is the big problem commodities, per se, are facing. Collapsing crude oil values are pulling most commodity markets deep into the red.

Here’s a question that needs answering: What is the fate of corn prices with crude now at low levels never before seen in history while at the same time the CRB index at a 19- to 20-year low?

From AgWeb.com, a headline: "As oil trades below $0, will corn or ethanol be next?" AgWeb goes on to state: "The oil trade on Monday was one for the history books. For the first time in history, oil traded below $0, providing proof the downside risk with commodities is not just $0."

Corn prices in the years 1999 to 2002 averaged around $2.12 a bushel or so, but in 1999 the market did fall to a low $1.96. Can history repeat itself moving forward, even though corn prices for new crop 2020 are around the $3.36 level?

Fundamentally, I can build a case for new crop 2020 corn to eventually fall to $2.70, give or take a bit. But I doubt corn can fall below $2 a bushel.

Crude oil prices have collapsed to the lowest levels in history, and the CRB index is today where it was 18 to 20 years ago. Where were gas prices at the pump, you ask, back then?

From 1999 to 2002, gas at the pump averaged $1.37 a gallon. However, in February 1999, prices at the pump fell to 99 cents a gallon with prices in St. Louis falling as low as 79 cents per gallon.

Big Oil is not lowering gasoline at the pumps to save consumers money. The cattle packing industry is not sharing the windfall profits with cattle ranchers.

It is a frustrating situation. But it is what it is.

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