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Commodities Enter Bull Market After U.S. Drought Scorches Crops

Commodities Headed for Bull Market as U.S. Drought Withers Crops
A grain bin at Kahle Supply and Feed Mill Inc.'s facility in Kalida, Ohio. Photographer: Ty Wright/Bloomberg

Commodities entered a bull market, gaining 21 percent from a June low, as grain prices surged following the most-severe U.S. drought in half a century.

The Standard & Poor’s GSCI Spot Index of 24 raw materials rose 0.9 percent to settle at 675.55 at 4 p.m. in New York. The gauge has jumped from this year’s lowest close of 559 on June 21. A gain of more than 20 percent is the common definition of a bull market.

Soybean futures rose to a record today in Chicago, and corn has soared 66 percent since mid-June. The U.S. Department of Agriculture has declared almost 1,600 counties in 32 states as natural-disaster areas after the drought seared millions of acres of pasture and cropland.

“The grains have been the strongest-performing subsector in commodities the past few months, and that has purely been driven by supply-side considerations and the U.S. drought in particular,” said Sudakshina Unnikrishnan, a London-based analyst at Barclays Plc.

Soybeans and grains have led advances this year in the GSCI gauge. The oilseed has jumped 43 percent in 2012, wheat in Chicago has climbed 41 percent, and corn is up 30 percent.

The commodity gauge has gained 4.8 percent in 2012. The MSCI All-Country World Index of equities has climbed 9 percent, and the dollar is up 2.1 percent against a basket of major currencies. Treasuries returned 1.3 percent, a Bank of America Corp. index shows.

U.S., China Economies

Commodities have rallied on speculation that the economies in China and the U.S. will rebound.

Chinese Premier Wen Jiabao said there’s “growing room for monetary policy operation” amid easing inflation, state television reported on Aug. 15. Confidence among U.S. consumers unexpectedly improved in August, and an index of leading indicators climbed more than forecast in July, separate reports showed on Aug. 17.

China is the world’s biggest consumer of everything from copper to pork to soybeans, and the U.S. is the largest user of crude oil and corn.

The jump in grains and oilseeds sent world food prices up 6.2 percent in July, the biggest increase since November 2009, the United Nations Food & Agriculture Organization said on Aug. 9. The gauge, which tracks 55 food items, slid 7 percent in the previous three months on the outlook for bumper world harvests and ample dairy and meat supplies.

Goldman Outlook

In mid-June, Goldman Sachs Group Inc. moved to a “near-term overweight” recommendation in commodities. On Aug. 10, the bank maintained forecasts for a rally in corn to $9 a bushel in three months, adding that soybeans may climb to $20 a bushel, while wheat may reach $9.80 a bushel.

Today, soybean futures for November delivery rose 2.9 percent to settle at $17.325 on the Chicago Board of Trade, after reaching an all-time high of $17.34.

Corn futures for December delivery jumped 1.8 percent to $8.3875 in Chicago. The price earlier reached $8.40, the highest since rallying to a record $8.49 on Aug. 10.

Wheat futures for December delivery advanced 2.1 percent to $9.22 in Chicago. The price has increased for five straight sessions and is up 47 percent since June 15.

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

U.S. corn production may drop to 10.78 billion bushels, a six-year low, while the soybean harvest at 2.69 billion bushels would be the smallest since 2007, the USDA said on Aug. 10. Crops are in the worst condition since 1988, a year when the corn harvest tumbled by 31 percent because of drought.

Hedge Funds

In the week ended Aug. 14, hedge funds held wagers on a rally across 18 U.S. futures and options contracts near the highest in 11 months, according to the most-recent government data. A measure of 11 farm goods showed bullish bets rose 0.6 percent.

Crude oil has rallied since mid-June as a European Union embargo on purchases of Iranian petroleum took effect July 1. Today, futures in New York climbed to a three-month high on speculation that euro-area leaders will make progress in resolving the region’s debt crisis this week.

Cocoa, gasoline, silver, gold and cattle also have posted gains this year.

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