Which Futures Have A Future?

Overshadowed by the drama in stocks and bonds, commodity markets had a case of the blahs in 1995. Hot money that had pumped up the action in '94 found greener pastures elsewhere. The previous year's most active market--coffee futures--suffered a 26% decline in turnover through November, while volume in commodity markets overall remained flat and prices edged up barely 4%. Commodities were "outclassed by the stock market," concludes William Byers, head of futures research at Bear, Stearns & Co.

With no sign of inflation on the horizon, 1996 could bring more of the same: commodities whiling away the year in choppy trading, with only a small upward trend. But as always, each market marches to its own drummer: Soybeans could boom even if crude oil remains dormant. Investors in the right place at the right time will find opportunities to earn respectable returns.

But where to look? The grain and oilseed markets seem the most likely suspects for big moves in '96. While other commodities languished, several in these categories made big gains as of Dec. 11: 50% for corn, 27% for wheat and 29% for soybeans, mainly the result of adverse weather.

YEAR OF THE BEAN? Hard times in the Midwest sowed profits for trend followers such as Steve K. DeCook of Fundamental Futures Inc., whose $70 million agricultural trading fund had jumped 27% through mid-November. DeCook is betting the next big play will come in soybean futures, which haven't rallied as much as corn despite equally tight supplies. A move to $8 per bushel from $7.23 as of Nov. 30 could happen "in a very short time," DeCook predicts. "Ninety-six may be the year of the bean. We just need a catalyst to push it along."

Weather is likely to be more of a catalyst for price moves than usual. Grain and soybean stockpiles are so tight that even an abundant crop would fill only some of the empty bins. If Mother Nature punishes the Farm Belt again, prices could soar.

World demand for U.S. farm products, meanwhile, is surging--especially from Asia. "China is becoming a huge factor," says Jacob Morowitz, head of the Chicago Board of Trade member firm USA Trading, who sees "a good deal of potential" for extending the rallies in both corn and beans. Yet contrarians can take heart, too: U.S. farmers, freed of government "set-aside" programs that idle land, will try to take advantage of higher prices by planting fence post to fence post. A bumper crop could provide opportunities for short market plays around midsummer, especially in corn.

Demand from Asia will also play big roles in soft commodity markets. Sugar could be the best bet for dynamic moves in '96. Huge harvests in Brazil, Cuba, Europe, and India will continue to weigh down prices, which already have plunged 25% through December 11. "In the first quarter, a lot of sugar will be coming to the market," predicts analyst Walter Spilka of Smith Barney Inc. Even as stronger Third World economies boost demand for the sweet white powder, sugar prices still have further to fall, Spilka posits.

NO JAVA JOLT. Among other "softs," bumper crops likely will keep prices under pressure and trading activity thin and bumpy. The coffee market seemed drained to the dregs last year, after a fitful 40% correction through December 11 provided a choice opportunity for those holding short positions. Now, although coffee stockpiles have grown tighter, traders doubt that java prices will perk up again. Consumer demand remains weak--the legacy of a 1994 price spike after Brazilian crop failures. On top of that, the outlook looks bright for next year's harvest in Brazil. No one is rushing into the flat cocoa market, either. The Ivory Coast, the world's top cocoa producer, will be piling a record crop on top of robust stockpiles. Healthy cotton crops in Pakistan, India, and China will supplement a U.S. harvest that came in below expectations but is still gigantic.

Energy futures markets have also been beset by abundant supplies. After 18 months of trendless, sideways motion, though, petroleum markets began waking up in November as an early cold snap set the stage for stronger natural gas and heating oil demand. That in turn ignited investor interest in "crack spreads," the trading of crude oil against its two major refined products: gasoline and heating oil. Yet rallies have tended to be squelched by the looming presence of Iraq. Lifting of the international ban on Iraqi sales could quickly knock as much as $3 from the price of crude, analysts project. And with many efficient new petroleum fields set to begin producing in coming years, prices will be broadly stable, predicts Michael S. Schiff of Coast Energy Investments.

FITS AND STARTS. Of course, even when supply and demand appear in balance, day-to-day volatility can crop up. Take industrial metals. Uncertainty and instability in copper, culminating in a London Metals Exchange investigation, temporarily sidelined speculators in late '95. Stability likely will return in the first quarter, says Bette Raptopoulos of Prudential Securities Inc. Copper prices could well continue bouncing around in a narrow range, unless a surprise--such as a bigger-than-expected surge in Asian demand--should spark a rally. Nickel and aluminum markets also will be reacting to the pace of economic growth in Asia, analysts say.

For commodities generally, expect a modest rise in prices. In coming years, says Merrill Lynch & Co. futures strategist William O'Neill, prices will likely advance fitfully, setting somewhat higher highs and slightly higher lows. But with inflation under control, don't expect a boom. And the markets that matter most--energy for the economy and gold for investor psychology--have moved the least. Bottom line: no reason to chase commodities unless you're willing to risk a frustrating challenge.

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