Todd's Take
Commodity Price Clues for 2019
While trade talks with China remain the most important topic for U.S. soybean demand in early 2019, a Dow Jones report late Thursday provided some of the most optimistic comments to date. "We made substantial progress," U.S. Trade Representative Robert Lighthizer said, after "two very intense and very long days of discussions."
Negotiations are taking a break for the Chinese New Year, and will continue next in China with hopes of securing an agreement by March 1. There was some confusion early as President Donald Trump was quoted as saying China's Vice Premier Liu He agreed to buy 5 million metric tons (mmt) (or 184 million bushels) of U.S. soybeans daily, but the comment was soon clarified as a one-time purchase of 5 mmt.
Being close to an agreement, however, is not the same as securing an agreement and we will continue to follow this story. It is difficult to say how beneficial to prices a trade agreement with China would be in 2019 as current prices are already reflecting some anticipation of success. There would probably also be a bullish emotional component in the market's response.
Fundamentally speaking, the U.S. would still face a large amount of ending soybean stocks in 2018-19, but the outlook for 2019-20 would show bullish improvement and give traders relief from the most bearish scenarios now on the table.
Aside from the soybean situation -- and while trading in grains has been fairly quiet this winter -- I wanted to give an annual update on how ag commodities did in 2018 and what that might mean for 2019. To be fair, DTN Contributing Analyst Elaine Kub did a similar look in December at a broad list of 33 commodities and drew several interesting insights. So, why go over this ground again?
Read "Dr. Copper Takes King Corn to School here:
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You may recall a previous column in this space looking at year-end results for 2017 in which I mentioned research by two economists, Werner De Bondt and Richard Thaler, and also comments about the concept of regression to the mean by psychologist Daniel Kahneman.
Read "The Market's Strange Phenomenon," here:
The point is that both the research and Dr. Kahneman's comments suggested there is a strong tendency for market prices that outperform average results in one era to underperform in the next and vice versa. Last year, I tested a list of 17 ag-related spot commodity prices, which also included gold and crude oil, and found that tendency to be true in comparisons of calendar-year results.
Naturally, I am interested in keeping the experiment going and wanted to see how the best and worst performers of 2017 fared in 2018. It's funny how 2017 already seems like a long time ago, but if you recall, Minneapolis wheat was the top performer in 2017 with a 14% gain. Prices actually peaked much higher in early July, but the influence of drought in the northwestern U.S. Plains was so bullish that it gave spring wheat the gold medal for price performance among its peers.
True to what our Nobel-winning researchers suggested (i.e. Kahneman and Thaler), spot futures prices of Minneapolis wheat were down 11% in 2018, ending fifth from the bottom of the list of 17.
The worst performer of 2017 was palm oil with a loss of 24% on the year. Palm oil had rallied to a four-year high in 2016, helped by adverse weather, and was the second best performer that year. The one-year drop of 24% in 2017 was a classic example of regression, but the following drop of 18% in 2018 was not.
Looking ahead to 2019, Chicago wheat and oats were the top two performers and should be considered vulnerable, judging by prices' long-term regressive tendencies. Three of the bottom four candidates of 2018 -- crude oil, palm oil and soybean oil -- have already traded higher this year and have to be considered bullish candidates for 2019.
As with any research, there is no guarantee how future prices will fall. However, over the past 22 years, the evidence favoring regression to the mean remains clear -- top performers have lost an average of 8.2%, while the worst performers have gained 12.3%.
Todd Hultman can be reached at Todd.Hultman@dtn.com
Follow him on Twitter @ToddHultman
(BE/BAS)
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