By: Dan Hueber –
It seems we are confronted with a dearth of fresh new for the ag sector right now. Considering that we are “officially” into holiday mode and rapidly nearing the end of the calendar year this is by no means surprising but nevertheless, we all continue to try and pay attention just in case a black swan takes flight somewhere and provides us with a shock. Unfortunately, the only shocking events that I have heard about this week have involved senseless loss of human life. While speaking of markets seems superfluous in comparison that is what we are here to do and seeing there is little in the micro picture to talk about we might as well look at the macro.
Several times in the past year I have written about the resurgence and interest in moving investment capital back into commodities as money searches for longer term value. One of the popular ways to facilitate this is through Exchange Traded Funds or ETF’s and through November of this year there has been at least $33 billion in new money flowing into these products. Energies and gold have undoubtedly been the major beneficiaries of this shift and due to their weighting in commodity indexes it has lifted the indexes well off the lows that were set back in January this year and appear to be in a long term positive position. I have often commented that in theory a rising tide should lift all boats and while I believe the ag sector has been the beneficiary of this trend, at this point the overall sector remains towards the low end of this year’s range.
To provide you with a little better visual of this, here is a chart of the PowerShares DB Agricultural Fund. I am by no means endorsing this particular fund, but within it we find a blend of 11 different ag commodities, including corn, beans, wheat, cattle and hogs that are weighted slightly differently and do change over time. For example, as of September 30th this year, sugar has the highest weighting at 19.92% and cotton the lowest at 3.08%. Regardless, it does provide a pattern for what is happening with prices for the world’s major commodities and just like an equity index such as the Dow Jones Industrial Average, should provide us with a picture of the overall trend and possibly provide a tipoff as to future direction.
Note that as with the broader commodity indexes, the ag index bottomed shortly after the beginning of this year and witnessed a nice advance into the middle of summer on weather and other concerns. Since that time, we have seen the prices steadily drift back lower and down to challenge the lows set early this year. While there is nothing in the action just yet that would “confirm” we are ready to turn back higher once again, I believe this appears to be a long-term bottoming pattern and we should now begin curving back higher as we move into 2017 and beyond. One other element to possibly add into the equation is that if investment money is on the quest for “value”, I do not believe there is another class of investment that offer a better one than the ag sector at this time.
So, if you like you can chalk this up to little more than Christmas Wish and until we begin to develop a supply (weather) issue somewhere prices could wallow around this range, but I continue to believe the next swing for ag products will be higher.