Analysts believe inflation concerns are behind investor interest in major commodities, which comprise the consumer price index
Fund money is pouring back into the grains and oilseeds sectors after a six-month exodus, and that should prop up prices for a while, analysts say.
“It’s starting to come back in very small doses,” said Darin Newsom, president of Darin Newsom Analysis Inc.
A lot of investment money flowed out of the grain and oilseed futures markets in mid-April as investors found more attractive options like wood, energy and coffee.
After milking these raw materials, they turn back to grains like spring wheat and oats.
These two markets have inverted futures curves where nearby futures contracts are higher than the deferred contracts, an obvious signal that the markets are fundamentally bullish.
The funds appear to “pick and choose” agricultural commodities and have not yet taken large positions in these markets.
“The next obvious one would be corn,” Newsom said.
Corn futures are not inverted, but the spreads are still bullish, much more so than for soybeans.
He believes fund managers are just biding their time because they know the harvest is still on and there is no rush.
“They still have energy screaming all over the place so they can play in other arenas while keeping an eye on what’s going on in the grain and oilseed playground and then jump in when the time comes,” Newsom said.
Arlan Suderman, chief economist for raw materials at StoneX, has also noticed since the end of September that fund money is flowing back into agriculture.
He believes it is an “inflation trade” driven by fearful investors who are becoming increasingly nervous about rising inflation rates.
You want to invest in the most important commodities that make up the consumer price index and drive interest rates so high.
“Why not have these basic products? It’s kind of a philosophy, ”he said.
A variety of commodity indices are at 7-11 year highs, reflecting increased investor interest.
“The commodities with the strongest story get more money than those with the worst fundamental story,” said Suderman.
The winners include crude oil, Minneapolis wheat, and vegetable oils.
Aware of the shortage of spring wheat due to disappointing harvests in Canada and the US, investors are following record or record prices for palm, soybean and rapeseed oil.
Suderman believes the influx of this inflationary trade will help sustain the bull run that has seen major Canadian crops like spring wheat and canola.
Newsom disagrees with this assessment of the markets.
“It’s a basic game. It has nothing to do with inflation, ”he said.
Both analysts agree, however, that fund money is definitely returning, which bodes well for the grain and oilseed markets.
Newsom believes the market highs were set in May and will not be revisited.
However, prices should stay strong this winter and possibly well into spring before subsiding, in part because he expects a stronger US dollar in 2022.
He’s a bit concerned about spring wheat prices, however, as wealth managers may soon decide they’ve ridden that horse as far as possible and are investing in corn instead.