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The recent commodity sell-off

Have prices landed on firm footing? Or will prices drop another leg lower?

Naomi Blohm, senior market adviser

July 7, 2022

7 Min Read
bull in chalk with caution tape

During the first six months of 2022 commodity futures rallied in part due to strong global demand, and in part due to tight supplies of many commodities. The rally was also linked to fund money buying many commodities as a means to hedge against inflation.

Over the past two weeks, many commodity futures have taken a plunge lower due second quarter profit taking by some of those fund groups as the Federal Reserve scheduled a hefty increase in interest rates as a means to curb inflation.

While this interest rate increase was aimed at efforts to cool inflation, now the fear is that the U.S. could face a recession and that overall global economic growth may be curtailing. In addition there are continued concerns about Chinese economic growth post-Covid.

The net climactic result had fund traders and other traders selling their commodity positions en masse, as though the global demand for commodities had stopped on a dime. We clearly know that is not the case, as demand for commodities is a continuous factor. But was the recent sell-off enough to tame the inflationary talk, especially with most grain commodity prices back at price levels from last summer, (before the inflation rally occurred, before the South American bean crop struggled, and before Russia invaded Ukraine)? Or will the bulk selling pick up again in the coming weeks? Here are three market factors I’m watching in the approaching weeks that may shed light on the answer.

Interest rates

As you already know, during the June Fed meeting, interest rates were increased. It is largely expected that the Fed may continue to increase interest rates very rapidly in the coming months. Including the latest rate hike, the Fed has already lifted rates by 1.5 percentage points this year, putting its benchmark interest rate at a range of 1.5% to 1.75%.

The minutes from the Fed's June 14-15 meeting show that officials agreed that the central bank needed to raise its benchmark interest rate to "restrictive" levels that would slow the economy's growth and "recognized that an even more restrictive stance could be appropriate" if inflation persisted.

The recent pullback in energy prices could mean lower gas prices in a few weeks and could signal that inflation is peaking, along with a cooling housing market, which may lessen the Feds need to increase interest rates so dramatically. If the Fed holds off on further interest rate hikes, that may help keep commodity prices supported for now. The next Federal Open Market Committee (FOMC) meeting will be a two day meeting, July 26 and 27.

Recession evidence

Many economists say a U.S. recession is very likely this year. Most define a recession as two straight quarters of downward growth. The economy contracted at a 1.6% annual rate in the first quarter, and last week, the Atlanta Fed's “GDP Now” tracker predicted that GDP growth will likely also decrease in a second straight quarter, with the official information being released soon. In addition, trade will be closely watching the U.S. government's release of employment data for June on Friday of this week.

A well-known recession indicator flashed in the bond market earlier this week, as the U.S. yield curve inverted. This indicator occurs when shorter-dated yields such as for the two-year bond are higher than for longer-dated debt such as the 10-year.

If evidence of a recession is seen, that alone might trigger another sell off in commodity prices as trade assumes that commodity demand will fall as businesses may not need to purchase as many raw commodities on the assumption that the consumer will not be interested or able to purchase the end product.  

Goldman Sachs Commodity Index

I’ve written before about the Goldman Sachs Commodity Index, and if you’re heard me give speeches across the Midwest, I often incorporate a chart image of this index into my presentations. This index is important because it measures the value of 24 different commodities, all into one index number. The metric is a mix of precious metals, energies, grains, livestock, and softs (i.e., cotton, sugar, coffee and cocoa).

During the month of June, this index posted a bearish key reversal on monthly charts. To me that says for now, commodity markets have likely topped, and need to take a further breather. During the first week of July, commodity prices have indeed sold off, with prices now testing long-term uptrend lines in many of those individual commodity markets, in addition to the long-term uptrend on the index itself, which had bottomed in April of 2020, right after the Covid-19 sell-off.

GSCI historical

In the past, the index has flashed this potential topping signal 6 times over the past 16 years:

  • The first time was back in August of 2006, and the price setback lasted for five months.

  • The next was the infamous 2008 commodity sell-off when the market peaked in July of 2008, and crashed lower for seven months.

  • In May of 2010, the index showed a short-term peak which actually did not lead to a crash, but rather a four month sideways consolidation phase.

  • The next peak occurred during May of 2011, with the index then falling lower for five months.

  • In October of 2018, was the next bearish technical signal, with prices then falling for three months.

  • January of 2020 was when the reality of Covid-19 was beginning to awaken the globe, with the index falling for four months, and also when we learned that commodity prices could indeed trade negative, with crude oil futures walloping lower into a negative price abyss.

The next question bears, how long will this sell-off last? 3 months? Or closer to 5 months or even seven months like 2008?

Unfortunately, this may be one of those times when commodity prices bow to the pressure of outside market influence, rather than the true supply and demand fundamentals of the commodity itself. For grain farmers, this can be nerve-wracking, as they witness the crops in their field wither from flash drought concerns, as we still are unsure what official planted acre numbers are in this country for crops growing in the fields, or if Ukraine will be able to harvest the reduced crop growing in their fields right now.

I can tell you this, I take heed of Goldman Sachs Commodity Index chart posting potential topping signals, and I also fear the possibility of a U.S. recession becoming a reality. My “bullish” horns have been retracted, with my “bearish” claws coming out.

Reach Naomi Blohm at 800-334-9779, on Twitter: @naomiblohm, and at [email protected].

Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition.  Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.

The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 

About the Author(s)

Naomi Blohm

senior market adviser, Total Farm Marketing by Stewart Peterson

Naomi specializes at helping farmers understand how to manage cash marketing needs and understand the importance of managing basis, delivery point considerations, cash flow needs and storage capacity. She earned her Bachelor of Arts in Political Science with a minor in Agriculture Business at the University of Wisconsin in Platteville. She has a Master of Science in Adult Education with an emphasis in Ag Economics from the UW-Platteville and a Master Certificate in Global Education, from the UW-Oshkosh.

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