When will the 5 year agricultural bear market come to an end?

Whether it is wheat, corn or soybeans prices have been falling since 2012 as enormous harvests and stocks bursting at the seems weighed on market sentiment.

Grain and bean futures have been pricing in a lot of bad news recently with funds holding a record short position. Given the slew of bearish news investors have had to digest in recent years it was perhaps not surprising that prices have been pricing in so much bad news.

Although wheat futures in particular prices surged earlier this week as some of those positions unwound – traders taking their cue from bad weather in the US – the longer term picture has been grim.

Although each of the three main agricultural commodities (soybeans, wheat and corn) have seen frequent attempts to break the long term downward trend only wheat futures have managed to achieve it, if only briefly – earlier this year in March and this week.

The main agricultural commodity futures markets remain heavily in contango indicating that the markets are still heavily oversupplied. Year ahead futures contracts are 10%-13% higher than the front month traded contract. If the futures curve is in contango, as they are now then a farmer may want to put his grain into storage and sell it at a higher price in the future.

Other commodities have seen strong price rebounds over the past year. Industrial metals (zinc, lead and more recently copper) and energy (coal and oil in particular) have risen sharply on stronger, more broad based economic growth and restrictions on supply (whether that is planned as in coal in China and oil in OPEC) or unplanned (strikes in copper mines in Chile). The natural extension of this is that we are now at, or very close to a recovery in grain prices.

Related article: Where do we stand in the commodity cycle?

Other indicators also point to a recovery in prices. Higher oil prices increase the input costs for farmers, and they are important in driving corn prices since corn can be used in ethanol as well as in food or animal feed.

Related article: Wheat prices: The top 10 most important drivers

Weather related factors could play a larger role in supporting higher prices should El Niño return. The World Meteorological Organisation sees a 60% probability of the weather phenomenon returning later this year. But even here the evidence is mixed. Compared with tropical agricultural commodities such as coffee and cocoa the impact on wheat, corn and soybeans tends to be limited. In part this is due to their geographical diversification – a disruption to supply in Australia doesn’t tend to coincide with a fall in output in the US.

Related article: Materials Risk explains: How El Niño affects commodity prices

If this is the bottom of the market then watch the price of wheat. Historically it has signaled a change in market direction well before corn or soybeans.

Related article: Curve appeal: Why investors looking to profit from higher commodity prices need to look to the future

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