GO
Loading...

Rainy Day Investing: Grain Prices Expected to Rebound

Commodities markets may have gotten soaked recently, but punishing rains through the American heartland and consistently strong demand are likely to drive the storm clouds away.

Roy Presson (C) embraces his daughters Catherine (L) and Amanda as they stand on the edge of State Highway HH looking out at their family farm on May 3, 2011 at Wyatt, Missouri. The Presson home and 2,400 acres of land that they farmed was flooded last night when the Army Corps of Engineers blew a massive hole in a levee at the confluence of the Mississippi and Ohio Rivers to help save the town of Cairo, Illinois.
Scott Olson | Getty Images
Roy Presson (C) embraces his daughters Catherine (L) and Amanda as they stand on the edge of State Highway HH looking out at their family farm on May 3, 2011 at Wyatt, Missouri. The Presson home and 2,400 acres of land that they farmed was flooded last night when the Army Corps of Engineers blew a massive hole in a levee at the confluence of the Mississippi and Ohio Rivers to help save the town of Cairo, Illinois.

Experts across the corn , wheat and soy markets expect the sharp pullback in recent weeks to be little more than a temporary correction in an overheated market.

As such, it could set up not only a good buying opportunity for investors but also an important point for companies that rely on commodities to purchase now before the trajectory resumes higher.

"We've come down to a level where we've enticed some export business again, suggesting fundamental support," says Jason Ward, market analyst at Northstar Commodity in Minneapolis. "Couple that with weather issues and you've at least got something to talk about."

Torrential rains across the Mississippi Delta have made it difficult for farmers to get much of their grains, particularly corn, into the ground yet. Only about 63 percent of the corn crop is in the ground nationally—compared to 80 percent at this time last year—while some key states such as Ohio and Indiana are well behind even that low number.

At the same time, drought conditions in Europe and China also have hampered harvests, making it almost certain that once the current pullback ends, prices will continue higher.

"I certainly view this setback as an end-user opportunity," Ward says. "I hope they're taking this opportunity to protect themselves from what should be a very volatile summer."

With planting running well behind schedule, this year's corn crop could miss Agriculture Department estimates by one million to two million acres, or about 17 percent of the total expectations of 92.2 million acres.

Corn prices, though higher Tuesday, have tumbled about 8.5 percent since hitting a historic high of $7.81 a bushel in mid-April.

But it hasn't just been corn. Metals, energy and virtually everything else in the spacehave fallen as the US dollar rebounded off multi-year lows and halted the stocks and commodities rally this year.

Investors have turned to the dollar as conditions weakened in Europe. Commodities, conversely, are seen as weak-dollar hedges, so the group has fallen on the greenback's strength.

And to be sure, there could be more problems for commodities before the market turns around.

"The reality is the selling from the other side of the market could keep a lid on things until we see some changes in outlook from that side and that starts to put money in commodities," says Darin Newsom, senior analyst at DTN in Omaha, Neb. "Long-term, we are going to see the market come higher."

Newsom sees corn prices easily reaching $7.50 a bushel with $8 a possibility, while soybeans could reach $15 and wheat likely will approach $9. He sees the biggest gains coming first from corn, then having a domino effect into the rest of the grains space.

"More than likely when the money does change direction again it probably is going to lead to a spike because you won't find many sellers," he says.

In addition to buying futures contracts, investors can play grains through exchange-traded funds, one of the most popular being the Barclays iPath Grains fund, which is off more than 9 percent since its February high.

Another of the main reasons for the fall of commodities has been the extent to which speculators have been driven out of the market, particularly in silver, which plunged after exchanges raised the margin amount that traders needed to buy an options contract.

However, speculators have not been completely washed out, with Bank of America Merrill Lynch reporting that "large specs are extremely net long commodities," suggesting from a contrarian point of view that more damage could be done. Even then, price drops likely would be temporary.

"In our view, any pullbacks for commodities are just corrections within a longer-term secular bull market for commodities," the firm wrote in a research note for clients. "Our longer-term view remains that commodities are in a secular bull market that lasts another 5 to 7 years."

Interestingly, while Americans howl over how high commodity prices have risen, driving up food and transportation costs dramatically, the drop in prices has brought one large corn order from North Korea and another believed to be from Japan.

"The markets in general are pulling back, but we're seeing commodities markets that have more positive fundamentals looking forward beginning to catch hold," Terry Roggensack, of the Hightower Report, told CNBC in an interview. "The rest of the world is not seeing our commodity prices are high as we feel they are here."

Contact Commodities

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More