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Opinion: the silver lining to dismal crop prices

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Every cloud has a silver lining. Even the one which has been sat over agricultural commodity markets.

It has certainly been a difficult time for crops' champions, bar those prescient enough to see the sugar squeeze coming.

The big grains, weighed down by huge harvests, have been the laughing stock of the investment community.

Winners and losers

 

Gold bugs have pocketed a rise of about 15% this year, oil prices have jumped by more than a half. Equity investors have enjoyed a recovery of more than 8% in New York and 10% in London, with dividends on top.

The figures for crops make less appealing reading. Chicago soybeans are down 6%, corn has lost 17%, while wheat has slumped up to 30%, depending on the exchange.

The difference between crops and the rest has been particularly marked since the spring,  when shares, oil and gold began significant upticks.

Which is quite the point. At some point, shares will at best slowdown, and potentially suffer a marked correction, if history is a guide. And when they do, crops' lack of correlation leaves them well placed to attract fast money.

Lessons from history 

Shares certainly look vulnerable. A look at rebounds from great bear runs past shows that, with a few exceptions, equity rallies suffer marked setbacks.

In some cases, these have wiped out recoveries, and more, as with Wall Street's first stab in 1929-30 at recovering from the Great Crash. Then a five-month rally of 47% was followed by a two-year slump in which shares lost 83%.

In other instances, stocks have held on to regained ground only to mark time, as after the 1974-75 rally. Then a 54% rebound over nine months was followed by a bear market that lasted the rest of the decade.

There is a notable exception, 1982, when shares bounced, and kept going. But conditions then, with interest rates falling from longstanding and high levels, appear to bear little relations to today's.

Contrary indicator

 

As it is, at seven months old, this rally is already pretty long in the tooth. And it is flagging what some would see as signs of overheating.

One is the apparent capitulation of bearish investors, who seem to have given up calling the top of the market.

Another is that, in the UK at least, small investors have begun investing in levels not seen since the technology boom. Their zealousness has been a pretty accurate harbinger of disaster since before the Great Crash.

Investors' alternatives

 

The question for crop investors is where money will go when equities do run out of steam.

Oil looks a poor bet. It has lost its historic ability to move in opposite direction to shares, questioning its use as any kind of safe haven from an equities storm, according to Jeremy Siegel of the University of Pennsylvania's Wharton School.

Bonds look the wrong turn in what may become an inflationary environment.

Even gold has shown signs of moving in time with equities, Mr Siegel says.

That is not a charge that can be laid at the door of farm commodities. Their refusal to join in this year's recovery party may allow them the last laugh.

By Mike Verdin

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