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Commodity Craziness Leads the Pack in the First Half

By Linda McDonough on July 5, 2017

What do wheat, lean hogs, sugar and orange juice have in common? Surprisingly you’re looking at the top two best-performing and worst-performing groups in the first half of this year.

Commodities took first prize in volatility from January to June. Wheat was up a rousing 29% and lean hogs provided a fat 27% return. Not bad for a six-month return.

Orange juice turned bitter, dropping 32%, and sugar provided a not so sweet 29% drop.

While weather, the best friend and worst foe of commodities caused some of these draconian price swings, some other secular trends were at hand.

Wheat, the nation’s third-largest crop after corn and soybeans, is especially susceptible to weather variations. The crop for aptly named Spring wheat is planted in early spring and then harvested in August and September. An especially dry April and May started the crop off on the wrong foot, and a continued drought in the Dakota’s is making farmers worried about their yields and sending the price of wheat skyrocketing.

Lean hog prices are being supported by increasing demand from China. Traders have recently been a bit worried about a jump in domestic hog production in China which may supplant some of its demand for U.S. imports. Hogs can be slaughtered for meat when they are as young as three to four months, making the production cycle much shorter than the six to twelve months it takes farmers to seed and then to harvest plant based crops.

Although a rebound in crops from better weather helped drag down orange juice, a bigger demand trend is at hand. High-calorie counts and a consumer shift away from all sweetened drinks have kept a lid on orange juice demand.

Added to that is a supply of oranges bouncing back from a low harvest last year. A green citrus disease that caused fruit to drop too early decimated the Florida crop at the same time as a major drought in Brazil. This year’s crop is in much better shape. Higher supply and lower demand is the worst case scenario for any commodity.

Sugar’s drop, which any American might assume is due to our nation’s push to more healthy eating habits, is due to a shift worlds away. India is the largest consumer of sugar worldwide. It is  one of the biggest importers of sugar, and when significant orders from India did not materialize earlier this year, sugar prices began to melt.

I don’t recommend commodity trades for Profit Catalyst Alert, nor do I plan to do so in the future. As each of these examples shows, each commodity market is driven by its own unique supply and demand drivers.

Anyone thinking that trading commodity futures might be the easy money it was for Eddie Murphy in the 1983 film Trading Places is sorely mistaken. Analyzing commodity prices requires expertise in meteorology, geopolitical studies, and global consumer trends. Despite the attraction of six-month gains of 30%, I’ll stick to what I know best (stocks) and leave commodities to the experts.

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