Commodity Corner: Morning Comments

Good morning,


DXM9  97.870  -0.183                       GCQ9  1301.8  +9.4                         ESM9  2761.25  -29.25                    CLN9  55.30  -1.29


A popular saying, which has been repeated numerous times of late, is “Sell in May and walk away”.  If traders, especially equity and oil, truly adhered to this, and haven’t watched the price action this month, they are feeling pretty good this morning.  If they sold, but have been remained tuned in all month, they probably got caught in the chop, with the rest of the world.  Today marks month end, where many will be glad to have May in the rear view mirror.  An apparent regression in the US/China trade talks, and now bringing Mexico back into the picture on this; tensions and tariffs in the Middle East, bringing into question production and available supply;  torrential rains and violent storms, wreaking havoc of the farm community, from crops to cattle;  and the dollar which has remained firm all month, as the Fed announced a neutral bias on policy, while global economic growth is being questioned and the majority of the world is cutting rates, effectively causing the US to be raising rates relative to everyone else, which creates additional stress on commodity pricing. 


Overnight, there have been several pieces of news, all which have rocked the markets.  President Trump proposed placing tariffs on Mexico, 5% beginning on June 10, which could move to 25% by October.  Aside from the obvious impact of this, it also makes the market feel a trade deal with China is even further away.  China came out and said it is fully prepared to implement its trade strategy surrounding rare earth elements, in response to the increasing US tariffs.  Additional pressure on equities came from China’s PMI data for May, which declined to 49.4 from 50.1 last month (49.9 was expected;  typically a number below 50 suggests a market is, or is on the verge of a recession).  In response to the collapsing equity markets, oil came under a fresh wave of selling, on the diminishing economic growth prospects, and gold caught another safe haven bid, and is back above $1300 (GCQ9).   


The oil market, which has been decimated of late, primarily on larger than expected production and stocks, and funds liquidating long positions, took another stab lower yesterday.  Prices were higher early, as Tuesday’s API data, showing a decline in inventories, allowed prices to bounce off the lows.  Then, data released from the DOE and EIA, showing a large increase in gasoline stocks, and crude stocks not down as much as expected, caused prices to revert back to the down trade.  On the break yesterday, Brent crude led the charge, with WTI following.  Similar story in today’s trade so far.  Oil prices have decline around $2 from yesterday’s settle (which was the low for this move).  The tone has clearly turned negative here, and while conditions may be oversold, if longs are trying to get out, that won’t matter to them.  Looking at a CLA nearby chart, some old lows to be aware of are:  52.41 and 51.99 (presently trading 55.48).  There are also a couple of old settles around 51.25 from last November.  The low from last year, made on Christmas Eve, was 42.53 (settle on that day was 44.27).  In the absence of any new turmoil or geopolitical situations popping up in the Middle East, and if OPEC remains quiet (next meeting is in early July), then oil could be on a march down to $50.    


In grains, selling in May and disappearing would have had your clearing firm putting out an all points bulletin to find you, as the record amounts of rain observed in May absolutely turned the grain world upside down.  Grain prices made new lows early in the month, on disappointment in the trade negotiations and large global production and inventories reported in the WASDE report.  Then as the month of May moved along, and the rains, storms and flooding didn’t dissipate, the concerns, which are now realities, of not getting crops planted materialized.  Grain prices begin creeping up, but then as we got deeper into May, and the crop progress reports continued to show a serious lag to planting, the markets exploded.  Capping this off was the number this past Tuesday, showing corn planting at only 58%, as the month comes to a close, but the rains remain.  Soybeans, which do have a later planting cycle, are also far behind, at on 29% planted.  With rain remaining in the forecast for the next week+, a similar story for beans is now the fear.  It has been a volatile week for grain prices, spiking to new highs, observing an aggressive rotation down, and then a resumption back up.  Prices are again lower today, as the USDA’s Perdue informed the market that the announced additional farm aid package MAY be available to farmers who file prevent plant, along with the farmers who actually plant crops.  The aid was originally believed to be earmarked only for planted crops.  Perdue also said a final decision on this hasn’t been made yet.  Some quick news on the grains from overnight.  African Swine Fever has now been reported in North Korea, with 20 hogs declared with the virus.  The strong bid observed in winter wheat futures of late, while not subject to planting delays, do have risks associated with all the rain storms.  Vomitoxin is a potential issue for the SRW, while scabs are a concern for HRW.  It wil take a few more weeks to determine the extent or seriousness of any damage. 


Clearly, the main concern for grains at the moment, is how much actually gets planted.  Rains remain in the forecast for the next week or so.  Anything planted now most likely will have lower yields due to the late planting.  The USDA conducts its June acreage survey, beginning tomorrow, and running through the first 2 weeks of June.  Most feel it is going to be very difficult to determine what is, or will be planted.  On the corn planting front, a good amount of what has been planted took place in the southern part of the US.  While the Corn Belt and Greta Plains have been soaked all month, the south and southeast portions of the country have had record heat and dry.  So the planted crops down there are enduring drought conditions.  The month of May has not been kind to the farmer!


Other commodities have had some interesting stories in the trade of late as well.  Coffee, which saw prices get hit hard most of the month, as good weather allowed for excellent growing conditions in Brazil and Vietnam, resulting in an expected large harvest, has rallied the past 3 sessions.  Strong storms and scorching heat in Brazil threaten the quality of the beans, as harvest is taking place.  Your other breakfast drink, orange juice, is also staging a rally, following a decline in prices most of the month.  An abundant orange crop in Florida is now facing some risks with the abnormal heat for this time of year.  Cotton prices, which have also been down most of the month, on the prospects of a large crop and slowing demand due to China, have been bouncing as well of late (it is lower today, at the moment), as the violent storms in Texas and Oklahoma pose a risk to the crops.  Feeder cattle was limit down yesterday, as the huge rally in grain prices squeezes margins for the feeder cattle trade.


Gold prices have moved back above $1300 (tracking August gold now, GCQ9), the recipient of the safe haven bid given the turmoil in the equity and oil markets.  If gold continues to push on up, watch the 1308.4 level, which is the 100 day moving average.  As pointed out yesterday, while gold keeps surging higher, silver has observed a serious lag to prices.  The price ratio of gold to silver is now the widest it has been since 1993.  Many are saying this is a signal of a struggling economy, with precious metals (gold) bid, while industrial metals (silver) lagging.  Copper prices, which ebb and flow on sentiment towards economic growth, are lower today. 


The US weather, which does have rain in the forecast for the next week, also has some breaks to the rain.  The trade is thinking (hoping) this will allow fields to dry out, and some planting progress can take place.  It is still likely that a significant amount of corn will not get planted, forcing the farmer to make a decision about filing for prevent plant, or planting soybeans.  The Great Plains have even better conditions, in terms of not as much rain, allowing for planting and development levels to attempt to get back to the averages.  The south should receive some rains and cooler temperatures, brining relief to the crops there.


Lastly, just an observation from many years in the industry.  When markets observe big moves over the course of the week, these markets often tend to go out at the extremes.  Equities, oil and grains are all worthy candidates for this week, although they seem to be moving away from these levels at the moment.  It’s a long day, a lot can still happen.  Being month end just adds to this possibility, in my mind.          


Technical Moving Averages:

Product               50 day                100 day              200 day

SN9                      872.75                   903.0                     909.0

CN9                      375.5                     382.25                   387.0

WN9                    459.75                   480.75                   513.0

KWN9                  427.75                   459.5                     504.0

MWN9                535.5                     553.0                     577.25

CLN9                    62.21                     59.16                     60.55

GCQ9                   1296.6                   1308.4                   1277.0

LHM9                  92.055                   85.025                   83.095

LCM9                   116.475                 117.475                 116.080

KCN9                   93.70                     99.70                     107.30

CCN9                   2342                       2318                       2289

CTN9                   74.49                     74.84                     77.83

SBN9                   12.35                     12.65                     12.62

JON9                    108.35                   115.15                   130.00

HGN9                  283.95                   282.85                   279.45


Have a good day.





Michael Clifford


141 W Jackson Boulevard                             

Ste 1201A                                                              

Chicago, IL 60604                                              

Trean Group, LLC                                              


312-896-2012  (fax)