A few weeks ago in my column I quoted Chuck Kowalski from the website thebalance.com as stating the following: “There’s normally an inverse relationship between the value of the dollar and commodity prices. The prices of commodities have historically tended to drop when the dollar strengthens against other major currencies, and when the value of the dollar weakens against other major currencies, the prices of commodities generally move higher. This is a general rule and the correlation isn’t perfect but there’s often a significant inverse relationship over time.”
I also stated that if the dollar did poorly in January, it would be a bullish omen for commodities in 2019. Now that January has ended, here is the skinny about the dollar. In January, the dollar closed a bit below the very middle of the trading range. The fact it closed out the month closer to the low than the high suggests the greenback will work lower the rest of this calendar year – at least based on the history of the dollar in January..
It should be noted that the dollar dropped sharply this week following a Federal Reserve statement that caught most everyone by surprise. From MarketWatch.com with headline “How a dovish Fed sparked a stock-market rally and tanked the U.S. dollar,” here is the first sentence from that article. “The Federal Reserve and its chairman, Jerome Powell, changed their tune Wednesday, striking a surprisingly dovish tone that sparked a stock-market rally, tanked the U.S. dollar and roiled other financial markets.”
To fully grasp how shocking the Fed statement was, the following quote comes from the same article. “‘This is one of the most dovish turnarounds by a Fed chair that I have ever seen in my 30-year career,’” said Tom di Galoma, managing director at Seaport Global Holdings.” And I totally agree with Mr. di Galoma. I was floored by the Fed and its abrupt reversal regarding hiking interest rates.
It was that Fed turnaround that caused the dollar to do a nose dive this week. And as the dollar headed south, here is how a handful of commodity markets performed: Lumber futures hit a four-month high, copper a one-month high, gold an eight-month high, silver a six-month high and crude oil rose to its best levels in two months. The weakness with the dollar is what allowed those commodity markets to do so well.
However, the main U.S ag-markets – grains and livestock – were unable to benefit from a weak dollar. To an extent, the reason for that was the recent outlook from the Congressional Budget Office. The CBO, commenting on the two most widely grown crops in the U.S., corn and soybeans, claim farm-gate prices are going to be stuck in a rut for years to come. From Successful Farming: “The CBO outlook, focused on farm subsidy costs, said corn would stay below $4 a bushel for the decade to come and soybeans would not top $9 a bushel until 2023. The last time corn and soybean prices were that low for an extended period was the early to mid 2000s.”
The CBO is projecting corn prices in 2019 to be around $3.60 a bushel and soybean prices around $8.23. But soybean prices will likely trade south of $8 a bushel if ending U.S. stocks reach 1 billion bushels. And if soybean prices slip under $8, there is nothing to prevent corn prices from approaching $3 a bushel. The CBO is more often right than wrong. And it painted a sobering picture for the U.S. ag-markets in the years to come. Still, and with all due respect, they are ignoring two wild card that can change the trend from a bear to a bull. Or, vice versa.
One wild card is Mother Nature, which has the power to change the trend of any ag market depending on the weather. The other wild card also ignored by the CBO is the value of the U.S. dollar and where it is headed. History shows clearly an inverse relationship between the dollar and commodity values. And imagine for a moment if the weather is threatening while the dollar is unusually weak. That has happened several times in history. If you doubt me, “You could look it up,” as Casey Stengel would say.
If you wish to look things up in the futures market, go to www.commodityinsite.com and check out “Haunted By Markets.” It is an e-book, 720 pages long about the futures markets. It clearly shows the times when the dollar was unusually weak amid threatening growing conditions.