Commodities prices are famously unpredictable, but many on Wall Street are nevertheless predicting these tangible investments can only continue to lag as a result of the global economic slowdown.
The Dow Jones-UBS Commodity Index, a broad index comprising 19 physical commodities including energy, agriculture and industrial and precious metals, has fallen nearly 15% for the year, one of the worst performances of any investment class. But in characteristic style, the same index has shot up nearly 10% over the past month, largely as a result of agricultural commodities within the index that have surged as a result of drought conditions limiting supply.
In fact, the corn crop has been so battered that pork producer Smithfield Foods has taken the unusual and counterintuitive step of importing corn from Brazil, where even the addition of expensive shipping costs results in a lower price than corn offered in the U.S. market, long the world’s No. 1 corn producer.
Pureplay commodities traders who owned the Teucrium Corn Fund (CORN), an exchange-traded fund, saw their investments surge 25% in the past month. The weather in St. Louis on Wednesday was expected to reach 106 degrees and dry, with some rainfall relief expected on Thursday.
The persistence of hot weather and low precipitation can only result in low U.S. crop yields, which is why even commodities bears like Morgan Stanley Smith Barney favor some commodities within the agricultural sector. But the thrust of the Wall Street firm’s recent Global Investment Committee monthly commentary is that slowing global economic activity will lessen demand for commodities, for which reason the firm is officially underweight the asset class.
Says Morgan Stanley in its report: “Hussein Allidina, head of commodity strategy at Morgan Stanley and a member of the Global Investment Committee, lists certain base metals—namely zinc, lead, aluminum and nickel—among his least favored commodities from a short-term, tactical perspective, primarily because of their ties to industrial activity.”
The Wall Street firm is also negative on oil for the same reason, but is bullish on gold, seeing it as a hedge favored by investors to guard against low interest rates and eurozone troubles.