Commodity Insight: Goes to show you never can tell

Over the past few weeks, and now that we are into the second quarter of the year, a number of commodity markets have been chopping around with a downward bias, or simply remained bearish.

It was my conviction that once the first quarter of 2023 was over, commodities would do well and lead all other markets higher. That, however, is not happening.

And the scenario unfolding with commodities being the weakest of the weak reinforces that classic song originated by Chuck Berry from 1964 entitled “You Never Can Tell.”

To argue that investors and traders are distressed by what is going on with stocks and commodities would be a gross understatement.

From CNBC is a headline that says it all: “Is it a bull market or a bear market? Stocks churning in same spot for weeks frustrates investors.” Ag traders are equally frustrated.

However, there is a huge cloud hovering over stocks and commodities which has Wall Street, Main Street and most investors and traders quite nervous.

And that is the reason, in my view, most markets are chopping around amid a great deal of confusion. The cloud I am referring to is the potential for an economic recession.

Over the past few weeks, the Leading Economic Indicators are suggesting that a recession is looming.

From Benzinga: “Meanwhile, the Conference Board’s Leading Economic Indicator continues to point to a recession ahead. The LEI dropped 1.2% in March to its lowest level since November 2020. On a YoY (or year over year) basis, the index fell 7.8%, a level not seen even during the recessions of the early ‘70s and early ‘80s.”

And from Reuters an unsettling headline blares “U.S. labor market cooling; leading indicator flashes recession.”

The article goes on to state: “‘Weakness is starting to spread and the LEI suggests a slowdown is ahead,’ said Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina.”

The markets, no doubt, are nervous with all the chatter about a looming recession. Adding to the angst is that most expect the Federal Reserve will hike rates by a quarter point on May 3.

However, after the next rate hike it is believed the Fed will pause for a long period of time in hopes of seeing inflation ratchet lower going into 2024.

Yours truly on the other hand is convinced China will bid aggressively for commodities, per se, and provide a price floor for hard assets of all kinds.

Plus, there is a glaring shortage of grains, cattle, energy and metals such as copper, silver and platinum that cannot be replenished quickly.

In the case of beef cattle a bull market based on supply lies ahead. It will take two to five years to rebuild the U.S. herd from where it is now, a 62-year low, to where it was prior to the pandemic of 2020.

As always when it comes to ag markets, the weather, Mother Nature, is the wild card for prices — and when it comes to a wild card with weather, the fate of a growing season oftentimes rests with an El Niño.

History shows clearly that weather scares happen often during the growing season in the United States.

The growing season is now at hand, and here is a headline from Reuters that is only a few days old, “World could face record temperatures in 2023 as El Niño returns.”

The date to suggest unusually hot and dry growing conditions could impact the U.S. crops and prices for me is — and has been since the early 1970s — June 15.

If the grain complex begins to show unusual strength on or about June 15, a ferocious price rally could unfold due to hot and dry weather impacting the growing crops.

On the other hand, others argue that the key date suggesting grains are about to head higher with a fury due to hot and dry weather is the day before, or the day after, July 4.

Those that focus on that date are right, if you use the year 2000 as your starting point. My work uses the year 1900 as a starting point.

But is a recession in the United States a given? Will the Fed pause with further rate hikes after May 3?

Will the El Niño bake the U.S. crops this growing season? There is no sure thing when it comes to markets.

To repeat myself, the late, great Chuck Berry summed it up best and most accurately when he would sing away his classic song, “You Never Can Tell.”

And that is why my No. 1 rule for trading should always be used. That rule simply states “use a stop,” because you never can tell.