Global Macro Outlook October 2017 - World Federation of Young Investors

Betting the Ranch: An Opportunity in Soft Commodities

  • September has been a tremendously interesting month for global capital markets: it saw the onset of two historically-unprecedented hurricanes hitting the United States, a 7.1 magnitude earthquake in Mexico, and profound geopolitical threats arising out of the turmoil between President Trump and North Korea. Despite a physical and geopolitical landscape promising almost catastrophic destruction, the S&P500 miraculously continues to trend upwards as it has for the whole of 2017, making record-highs as the month goes on.

 

  • On Thursday, Fed Chairwoman Janet Yellen surprised markets with an unexpectedly hawkish tone surrounding a possible December rate hike. Despite this, however, we remain cautiously short on the USD: inflation data in the U.S. remains soft, and many of the proposed fiscal plans that were expected to lift the Dollar, such as Trump’s proposal to reduce the corporate tax rate from 35% to 15%, remain in a political quagmire. As a result, our long EUR/USD thesis remains intact for the time being, and we would consider using 1% to 1.5% dips in the pair (as it did during the FOMC meeting) as opportunities to add onto the existing currency position.

  • Whilst considering opportunities outside of the FX market, one opportunity that promises to be a viable long-term investment is the possibility of a multi-year bottom in soft commodities. As we see from the chart on the left, soybean prices have been trading around the lower end of a multi-year range starting from December 2007.

 

  • The apprehensiveness in going into agricultural markets is an understandable one: soft commodities have been in a secular bear market since 2013, and despite the promises of demographical changes inspiring strength in the sector, prices have remained relatively weak in the preceding years. Furthermore, unlike other, more liquid, commodities like Gold and Crude Oil, agriculture has always been a traditionally more complex sector to be exposed to. However, a confluence of technical and fundamental factors seems to suggest the possibility of impending change.

 

  • From a fundamental point of a view, the recent bear market in the USD and dollar weakness has every potential to spark a potential breakout to the upside for broad-based commodities. A weak US dollar makes agricultural exports more competitive, which inspires its inverse correlation with commodities such as soybeans and wheat. And from a technical point of view, we see a unique confluence of many soft commodities trading at the low of their respective multi-year ranges, in everything from soybeans, to soybean meal, corn, as well as wheat.

 

  • While it has traditionally seemed complicated to find exposure to agriculture, with the emergence of commoditised products like ETFs, one can buy into an asset like the Powershares DB Agriculture Fund (Ticker Symbol: $DBA) to profit from price trends. We see the broad-based trend as being down, but if current technical and macro trends play out in its favour, then there exists the potential for an explosive breakout above 19.50 in the short-to-medium term.

By Nicholas Tan Wei Hong