Farmers watching the stock market make a never-ending series of record highs can only wonder if any of that bullish enthusiasm will spill over to agriculture. So far, the confetti from Wall Street’s New Year’s party had both positive and negative impacts on farmers.
Back in the throes of the last big boom that preceded the financial crisis of 2008-2009, the rising tide lifted all boats, helping stocks and commodities. Investors seemed eager to buy just about anything.
This time around the mood is more cautious, at least in some respects. Until recently bulls haven’t shown much interest in commodities, despite talk that the stronger economic growth helping drive the stock market could increase demand for energy and industrial metals. That dynamic has changed. Money managers hold a record net long position in crude oil, helping push futures past $64 a barrel. Copper is trading at a four-year high, and even gold is back above $1,300 an ounce Overall, the CRB Index is at its highest since November 2015.
Investors are having another “déjà vu” moment. The dollar started 2017 at its strongest level in 15 years. But as 2018 begins it’s lost 12.5% of its value.
The weak dollar was also a hallmark of the last decade’s bull market. Investors sold dollars and bought hard assets, a trade that became a cycle to preserve purchasing power. This time around it looked like the dollar was ready to roll higher. The Federal Reserve began to raise interest rates, which normally brings buyers into a currency. But suddenly the Euro is on fire as growth on the continent picks up and the central bank there signals its own more aggressive path. That caused the dollar to lose almost 1% of its value Jan. 12, a huge move for a currency. Still, the greenback seems only mildly undervalued though swings of 6% could be seen over the next year.
The best barometer of these currency moves lately has been seen in wheat, where the weak dollar helped U.S. prices rally for a month while the euro pressed Paris wheat to contract lows.
Inflation remains tame in the U.S. despite just a 4% unemployment rate, while there are signs prices may be heating up faster overseas. Normally inflation drives investors away from a currency, but Euro buyers see it as a sign of better things to come from their economy.
Interest rates are rising in the U.S., albeit slowly. The Federal Reserve has increased its benchmark short-term rate five times, with two or three more ¼-point hikes likely in 2018 according to betting on federal funds futures. And yields on two-year Treasures closed just under 2% before the Martin Luther King Jr. Day holiday weekend, the highest since the financial crisis.
That has begun to flatten the yield curve, lowering the difference between short and long-term rates. And inverted curve, when short-term rates are above the long term yield, is one of the predictors of recessions. But based on the Fed’s timeline, the U.S. is still a long ways from completing that pattern.
Indeed, money managers seem to have no fear. The stock market volatility, or “fear” index remains near record low levels, suggesting buyers of stocks don’t want to pay much for put option protection against a downturn.
Stocks meanwhile are buoyed by expectations corporate tax cuts will boost earnings that are already very strong. While the market is undervalued by most fundamental measures, my projected high for the year is still 100 points away for the S&P at 2,860. Whether that could bring bulls back to ag remains to be seen.
Senior Editor Bryce Knorr joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Advisor. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.
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