December 04, 2023

Commodity Insight: Quite the year

The first half of 2023 has come to end and it was bullish for the stock market, and though commodities, per se, remain stuck in a trading range that goes back a year, there were some historic events that did unfold with hard assets.

By any measure, 2023 has been quite the year. And the year is only half over.

In 2022, steep losses were seen in the stock market, with most analysts calling for follow-through weakness this year. Instead, the first half of 2023 showed stocks having the best six months in 40 years.

The S&P 500 is up 14% and the Nasdaq has jumped 32%. And bitcoin, which fell 60% in 2022, is up 85% in the first half of this year and the best performing asset class among more than two dozen tracked by analysts at Goldman Sachs.

The CRB index that is to commodities as the Dow Jones is to stocks remains locked in a trading range the past year.

Weighing on the CRB are the energy markets that cannot find the footing to rally while the livestock markets and, in particular, cattle are the strong link in agriculture.

From the U.S. Department of Energy: “The Strategic Petroleum Reserve, the world’s largest supply of emergency crude oil, was established primarily to reduce the impact of disruptions in supplies of petroleum products and to carry out obligations of the United States under the international energy program.”

But it is now estimated that the SPR reserves are the lowest since August 1984. In theory, “reserves” will be totally depleted by January.

Crude oil prices dropping as they have been doing is weighing heavily on the CRB index and keeping it in a trading range.

In early March 2022, crude traded as high as $129 a barrel, but in May 2022 slipped to $63 a barrel. This week, crude is $72 a barrel.

There has been little bullish for crude in the first six months of this year and the low supply levels seen with the SPR hint loudly that Texas tea is poised to rally sharply as values appear cheap.

But feeder cattle prices have rallied in recent days to new, all-time-historic highs in the opening months.

In 1978, feeder cattle traded as low as $46.15, but a month ago in June posted a record high of $248.37. The U.S. cow cattle herd is the smallest in 62 years.

It will be 2025 at the earliest before producers can rebuild their herds large enough to cap price gains. The cattle market is the bright shining light in U.S. agriculture.

The U.S. Department of Agriculture did offer a shocker of a grain report a week ago that may help the CRB index to move higher and break out of the trading range it has been locked into for a year.

The report was actually a bullish shocker for soybeans and a bearish shocker for corn. And it all had to do with planted acres.

The USDA data showed producers planting 2.1 million more acres of corn than expected, the largest since 2013. The report also showed that planted acres of soybeans were down a whopping 4 million from expectations.

The marketplace took one gander at the data, and by the close, corn prices fell 35 cents a bushel while soybean prices were up 77 cents. Grain producers looked at the price swings and said loudly, “You gotta be kidding me!”

However, the heart of the growing season is ahead and the key to grain prices is the weather. History shows that a corn crop is made or broken in July; a soybean crop in August.

Based on the recent USDA grain report, the corn crop, due to the extra acres planted, can stand a yield loss should the weather turn troublesome. By the same token, there is no room for crop problems with soybeans due to short acres.

The growing season is ahead and the shock with this year’s planted acreage hints loudly that further surprises, bullish or bearish, into harvest are likely.

The first half of 2023 has been bullish stocks and the crypto markets. But the Federal Reserve is still calling for at least two more rate hikes this year to fight inflation.

The Fed may get even more aggressive with higher rates if the U.S. labor market continues to be robust.

Stocks have been doing well this year, but past performance is not indicative of future performance. As for the crypto markets, keep in mind they are backed by nothing physical and produce nothing.

I favor cattle on the long side of the ledger, but believe the futures market could drop sharply from here.

I will only be a buyer on weakness. Up here where the “air is rarefied” is no place to chase cattle futures.

As for grains, allow me to repeat what I stated before — a corn crop is made or broken in July; a soybean crop in August.

For now, I remain in the camp that believes commodities, per se, are headed higher. I cannot imagine crude oil doing much more to the downside.

If that all-important market can find the footing to rally, the second half of 2023 will be more bullish than bearish for commodities.

It has already been quite the year and I expect more of the same in the second half of 2023. Yes, it has been quite the year.