Investors: Commodity Shopping Spree

• All three major US stock indexes are getting closer to completing long-term technical tops on their respective monthly charts.
• This would indicate the flow of money out of stocks should continue, with the commodity complex an attractive draw for investors.
• Once there, the various markets will be measured on, among other things, fundamental bullishness indicated by inverted forward curves.

As I talked about in my previous piece for Barchart, it looks like all three major US stock indexes have hit their cyclical peaks. If so, early 2022 could see a lot of money taken out of equities meaning investors will be looking for a new casino in which to play. Often, in such cases, this turns out to be the commodity complex. But investors have evolved over time, so the days of flooding every sector of the complex with cash are long gone. These days funds, at least the one’s I’ve had the opportunity to visit with, pay more attention to fundamentals. But not just the run of the mill made up version from USDA that folks in the industry used to talk about, but real supply and demand indicated by basis markets and futures spreads. These market reads are used in conjunction with real research firms doing work on actual crop production potential, rather than the imaginary system in place at USDA. Given this as a backdrop, when global investors go shopping they will find the commodity complex stocked with possibilities, using only inverted (backwardated, for you New York folks) forward curves to guide us. 

In Grains the most fundamentally bullish market is oats, where the old-crop March-May futures spread closed Tuesday at an inverse of 29 cents. This is an incredible spread when we factor in the nearby March futures contract is priced near $6.47. The problem with oats is it is a thinly traded futures market with a reputation for being rough on outsiders. Like young calf wandering into a stream of piranha rough. All three wheat markets are fundamentally bullish, though Minneapolis (HRS) looks to have the tightest supply and demand giving its inverted forward curve from March 2022 through March 2023, though like oats the Minneapolis wheat futures market is known for hosting smaller volume trade. King Corn is certainly attractive from a volume and open interest standpoint, and its forward curve shows a mix of weak carries and solid inverses. 

Every market in the Oilseed sector is showing bullish forward curves, so investors only have to choose what other criteria they are looking for to decide where to place money. Soybeans are the largest market, with the new-crop Nov22-to-July23 forward curve showing an inverse of 9.5 cents. Canola and Malaysian palm oil will also draw attention, as will soybean meal and bean oil. 

In Softs, four markets stand out: cotton, coffee, sugar, and lumber. The latter may be yesterday’s news as it had an incredible run during the first-half of 2021, but its inverted forward curve will keep investors hoping for a solid US economy in 2022. Coffee is sitting near its recent highs and is actually showing signs of an intermediate-term selloff. Add to that its inverse isn’t as strong as others and investors may let this one percolate a bit longer. March cotton posted a new contract high Tuesday, supported by a strengthening inverse in the March-May futures spread, and is showing no signs of slowing down. Sugar seems to be set to take off, with the reasoning tied to adverse weather in Brazil. Again, ag production futures are weather derivatives at heart so this could attract some global investment money. 

Energies have received a lot of attention already, so much so the spot-month crude oil contract moved to a new 7-year high Tuesday. We are also seeing the backwardation in the spot-spread strengthen, indicating this move hasn’t scared off the commercial side. Similarly, distillates (heating oil, jet fuel, diesel fuel, etc.) moved to its highest price since September 2014 while its spot-spread climbed to a backwardation of nearly 6.0 cents. Coal is a thinly traded market but has certainly seen its share of global interest over the last six months or so. Then there’s natural gas. I know there are likely a number of investors itching to get into this market, and all I can do is wish them the best of luck.