Every cloud has a silver lining, but this may not be true this year for soft commodity investors as extreme weather wreaks havoc on crops.
While the UK and much of northern Europe wipes up after months of record rainfall that has devastated acres of crops, hot, dry weather in the US has frazzled vast areas of corn and soybean.
Hot temperatures ruin potential yields and farmers are expecting a poor crop.
Soft commodity markets are moving to reflect these lower expectations, with higher prices pushing through already.
According to Barings, Chicago December Corn Futures have rallied by 46.5% between May and July, while Chicago September Wheat Futures have increased 38.6% in the same period.
Farmers were anticipating a bumper harvest, said the US Department of Agriculture, haftr planting the most corn acres in the country since the late 1930s
“We believe the scale and rapid advance of grain and soybean prices has been due to the very large change in market expectations, which had actually been for a bumper harvest as the planting conditions in April and May had been very strong,” said Barings investment manager James Govan.
Instead, World Agricultural Supply and Demand Estimates have downgraded corn yield estimates from 166 bushels per acre in June to around 146 bushels per acre in July.
“Agricultural companies involved in the ‘upstream’ such as fertiliser, machinery, seed and crop protection have performed strongly, supported by the rally in grain and soybean prices,” said Govan.
“Asian-based crude palm oil equities have also begun to perform well, because the deterioration in the US soybean crop improves palm oil fundamentals as market expectations on the overall vegetable oil inventories are typically revised lower.
“At Barings, we continue to seek to identify the best performing industries in a scenario of strong soft commodity prices, including companies engaged in machinery, fertiliser, seed and crop protection, and we aim to take full advantage of this upward trend.”