There has been no shortage of fireworks in the commodities sector in the first quarter of 2014 after a relatively dormant second half of 2014. What has changed in the last three months?
Here, in no particular order, are the factors pushing the commodity complex.
At the Fed, leadership has changed with Ben Bernanke’s eight-year tenure having come to an end. Bernanke will likely be viewed as a cyclical dove. His dovish policies developed after an academic career of studying the “Great Depression” and what went wrong, destined him to learn from past monetary policy mistakes. He concluded that the main policy mistake was to remove stimulus too soon. Will Yellen continue along this same path? It is early, but so far Yellen is viewed as a structural dove. As we go further down the road and as we put more distance between ourselves and the financial crisis, it is likely that we reach a fork in the road and Yellen will go one way whereas Bernanke may have gone the other. The most noteworthy change communicated by Yellen to date appears to be the definition of what is meant by “a considerable amount of time” before tightening begins. It was previously perceived to mean one or two years, but we may now be looking at six months.
While commodities, in general, had a resurgence in Q1, the most dramatic moves happened in the softs sector. Take a look:
Coffee(NYBOT:KCK14)- Appreciated 86% January to March, lifting prices to two-year highs.
Sugar(NYBOT:SBK14)- In just over five weeks appreciated 23%.
Cocoa(NYBOT:CCK14) – Is currently hovering near 30-month highs and has gained 12% year-to-date.
Cotton(NYBOT:CTK14) – In the last five months has added 19% currently trading just below two-year highs.
Best of the rest
Carnivores have had to pay up at the grocery store with pork and beef prices both trading just off record highs. Lean hogs (CME:LHK14) futures have started to correct lower but prior to topping out two weeks ago prices had appreciated 32%. This move has largely been due to porcine epidemic diarrhea virus or PEDv, which has killed millions of piglets since first afflicting the United States last spring. As for beef prices, live cattle (CME:LCJ14) also appear to have reached an interim top in recent weeks. To a lesser extent cattle have gained 7.8% year-to-date. This trend may not be over as wholesale beef prices are still on the rise.
Year-to-date corn (CBOT:CK14) prices are up 20% with fuel being added to the fire by the March 31 planting intentions report. Ending stocks came in just below market expectation and acres were reduced so it was a bullish report. Old crop soybean (CBOT:SK14) prices are trading just below $15 per bushel near six months highs but the real story is the spread between old and new crop nearing $3. Soybean stocks came in line with the estimates and acres came in on the high side of expectations. Adverse weather domestically in wheat (CBOT:WK14) growing regions combined with the current situation in the Ukraine contributed to wheat prices gaining 29% inside of 60 days causing futures to challenge their highs from last fall.
The seasonal appreciation we generally experience in RBOB(NYMEX:RBK14) (unleaded gasoline) in the first quarter did not materialize which will make it a rally that has happened now 15 out of the last 16 years. Still, keep in mind that past performance is not indicative of future results. It appeared into February that this year would be no different but prices corrected and are within pennies of where we started at the turn of the year.
The cold weather in the Northeast and Midwest that likely contributed to the slack demand in RBOB and price action also played a factor in the natural gas market as the Polar vortex helped propel futures in natural gas from November to March nearly 40% higher.
Dr. Copper has diagnosed China with an ailment and when we see a slowdown or the market prices in a slowdown in demand from the world’s largest consumer prices react. 50¢ per lb. were stripped out of the copper market before establishing an interim low in Mid-March. Staying with the same theme let’s touch on performance of gold and silver.
Gold (COMEX:GCK14) finished the quarter higher by $100 an ounce closing out near $1300 with two positive months and one losing month. Silver experienced a false start gaining 10% only to give it back and finishing nearly unchanged with prices currently hovering near $20 an ounce. I expect both gold and silver prices to remain range-bound.
Last year’s darling, the Nikkei, was actually one of worst performers in Q1 shedding 14%. This was unlike the U.S. equities which, by and large, continued to climb the wall of worry lifting prices to record highs. The S&P is near 1900, the Dow approaching 17000 and the NASDAQ within 7% of 4000.
Now more than ever, it is hard to overstate the importance of using alternative, non-correlated asset classes such as commodities and managed futures to diversify more traditional holdings such as stocks and bonds. With the taper under way and tightening on the horizon, equities appear to be ripe for a correction and interest rates are set for a move higher.