Analyst: Markets Running Out of Reasons to Remain Bullish?

Back in August, the commodity markets began picking up out of their COVID-19 doldrums. While prices have risen steadily since then, many in the markets are wondering how long the uptick can and will last. Clayton Pope is the President and Owner of Clayton Pope Commodities in Champaign, Illinois. Some in the commodities industry are beginning to wonder if the markets may be close to running out of reasons to remain bullish.

“We’ve thrown a lot of bullish factors at this market, no doubt about that, and you do wonder if we could be running out of fuel in the short term. But on the other hand, there’s still some very live issues out there that could definitely be providing more fuel. For one thing, the bearish sentiment when they started this thing off in August was sort of off the charts in terms of what a dismal outlook looked like. People were talking about a 3.3-billion-bushel corn carryover, and beans of 5-or-600-million, something like that. And then, all of a sudden, things started to turn.”

Pope says fund buying is one of the reasons for the upturn since August.

“it’s been an interesting rally just because the funds came in here with both feet and have just propelled this thing non-stop, and it is very unusual. Not unprecedented, but it is pretty extraordinary to see a move be as one-sided as this one has been, and as such, it’s really caught a lot of shorts off guard, I think.”

Many in the commodity markets believe demand is another factor that helped prices rise from their COVID slump.

“Everybody keeps referring to this whole thing as a ‘demand-led market.’ We have the first demand-led market in a long time. It’s interesting to note that if you look at the carryover and at the whole balance sheet for soybeans, since the August supply and demand report compared to the November one, the only significant change on the demand side was exports, which have gone up by 75 million bushels. That’s a lot of bushels, but it’s not that many. On the other hand, the supply in that same period from August to November has dropped 346 million bushels, so the net of those two is about the 420-million bushel drop in carryover. So, it’s definitely been a hair-raising drop to see that carryover go from 610 to 190.”

He says calling it a demand-driven market is a “misnomer.” The thing that’s changed the most in the market is the supply, not the demand. Pope looked at the immediate future of the commodity markets.

“Demand is obviously on everybody’s mind because China is the unanswerable question for now and we’ll just have to wait and see. Certainly, the timing of things would suggest that they are on the tail-end of their buying program right now. Going forward, I would think the biggest question supply, and that looks down to South American at Brazil and Argentina. They’ve had their problems and are looking at some planting delays, but let’s face it; it’s still a little early. Last week, two of the main Brazilian consulting firms down there both raised their production estimate for Brazilian soybeans.”

Pope says the impact of the South American soybeans on the commodity markets is yet to be determined.

“The point is it’s not a universal call for some crop disaster in Brazil when an awful lot of their think-tanks are thinking that things are looking pretty darn good. So, we’ll have to see; the devil will be in the details going forward, no question. Moisture levels are very dry overall, which has delayed planting for both Brazil and Argentina, but look how many years the U.S. has started off dry. I know it’s a different type of soil down there, but the real test of this market fundamentally is a month or two down the road, probably.”