US grains driving GSCI bull market

Whitney McFerron London

Commodities are poised to enter a bull market, led by surging grain futures amid the worst US drought in half a century and on mounting optimism that growth in the US and stimulus from China will boost demand.

The Standard & Poor’s Goldman Sachs Commodity Index (S&P GSCI) of 24 raw materials rose as much as 0.7 percent to 673.82 points yesterday in London, the highest since May 3. The gauge has leapt 20 percent from this year’s lowest close of 559 on June 21. A close at this level will signal commodities entering a bull market.

The worst US drought in 56 years sent soya beans to an all-time high of $17.05 a bushel (R5 205 a ton) on the Chicago Board of Trade yesterday, while maize reached a record $8.49 a bushel (R2 777 a ton) on August 10.

The US Department of Agriculture has slashed its maize harvest forecast by 27 percent since June, after declaring half of US counties as disaster areas while droughts stretched from California to New York.

Sudakshina Unnikrishnan, a Barclays analyst in London, said: “The grains have been the strongest-performing subsector in commodities the past few months… purely driven by supply-side considerations and the US drought in particular. While the rest of the commodity sector has been grappling with euro zone debt and macro headwinds, the grains have been isolated from that.”

Oilseeds and grains are the best-performing commodities this year among 80 tracked by Bloomberg. Soya beans have jumped 41 percent this year, the biggest rise on the GSCI, as the drought parched crops in the US, last season’s top producer.

The GSCI’s 4.4 percent gain lags a 9 percent rise in the MSCI index of world equities. Treasuries returned 1.3 percent, a Bank of America index shows.

The jump in grains and oilseeds sent world food prices up 6.2 percent in July, the biggest rise since November 2009, the UN Food & Agriculture Organisation said recently. The gauge, which tracks 55 food items, slid 7 percent in the three months to June on an outlook for bumper world crops and ample dairy and meat supplies.

In mid-June Goldman Sachs moved to a near-term overweight recommendation in commodities. On August 10 the bank maintained forecasts for a rally in maize to $9 a bushel in three months, adding that soya beans might climb to $20 a bushel while wheat might reach $9.80.

Maize rose 0.4 percent to $8.27 a bushel in early trade in Chicago yesterday, while soya beans traded at $16.985 and wheat at $9.07 a bushel.

“We expect soybean prices to outperform to ration resilient export demand in the face of critically low US supplies, corn prices to rally to secure sufficient ethanol demand destruction and wheat prices to underperform maize prices on relatively higher supplies,” Goldman Sachs analyst Damien Courvalin wrote on August 10.

US maize output might drop to 10.78 billion bushels, a six-year low, while the soya bean harvest at 2.69 billion bushels would be the smallest since 2007, the US Department of Africulture said this month.

Crops are in the worst condition since 1988, a year when the maize harvest tumbled by 31 percent because of drought.

Last week hedge funds held wagers on a rally across 18 US futures and options contracts near the highest in 11 months, official data show. A measure of 11 US farm goods showed speculators’ bullish bets in farm commodities rose 0.6 percent.

The two crude oil components in the GSCI index, West Texas Intermediate and Brent, have rallied 24 percent and 28 percent, respectively, since June 21, as an EU embargo on purchases of Iranian oil took effect on July 1 and as European economic leaders committed themselves to preventing any break-up of the euro zone. – Bloomberg