May 2007 Monthly Commodity Outlook Sample

Interest Rates Historically, market-driven interest rates all along the yield curve rise into April. Is it mere coincidence that US income taxes (state and federal!) are due April 15? Is it possible that monetary liquidity tightens as massive financial assets move from out of the private and into the public sector in order to pay taxes? But by May, that dynamic has often played itself out and, in fact, rates have exhibited a strong tendency to reverse and trend lower at least through the remainder of the US fiscal year. Thus, financial instruments all along the yield curve have tended to establish a seasonal low in May and to begin rising. Thirty-year Treasury bonds, for example, have tended to surge from the second week of May - Treasury refunding auctions are held during the second week of the second month of each quarter - into and through deliveries against June CBOT futures. Do dealers who buy at such auctions cover short hedges as they sell into strong demand? Consider 10-year Treasuries that perform in similar fashion. The initial surge has often been into first deliveries against June CBOT futures, with another through the end of the quarter. Does the money paid into the public sector (taxes) start to flow out and be recirculated? Instruments at the short end of the curve also rise, although they have been choppier than at the longer end for the last two years - perhaps in response to the Fed's rate hike cycle. Despite assumptions (hopes?) about the Fed lowering rates this year, the CRB Index suggests deterioration in the housing market may have to accelerate for the Fed to do so. The FOMC is scheduled to meet May 9 and again June 27-28. Metals The seasonal pattern suggests July Silver tends to rally into early May, perhaps as longs that liquidated May contracts in order to avoid delivery reinstate long positions. But July has then tended to drift lower into its own deliveries and the summer doldrums. In contrast, copper is normally consumed most heavily during construction season. Will it this year, with the US housing market under a cloud? Will demand from high-growth economies such as China more than compensate? Softs Lumber for summer delivery, however, has tended to weaken into the construction season. Inventory accumulated during winter need to be liquidated, but it faces competition from a timber harvest made much easier in good weather in the Rocky Mountains and the Pacific Northwest. Coffee consumption is heavier in the Northern Hemisphere than in the Southern. But just as the large Brazilian harvest begins, summer arrives north of the equator and consumption declines. Thus, prospects for growing supply and declining consumption pressure price lower into deliveries against July futures (6/21). Cocoa beans ripen October-August. The main crop, accounting for about 80% of total production, is harvested October-March; the mid crop accounts for the remainder and is harvested May-August. With supply already large and mid-crop harvest beginning, the market has tended to decline into mid June and into deliveries against July futures. But is the market moving counterseasonally this year, with a breakout above 1800? Florida is the dominant orange-producing state, with harvest running January through June. Thus, with supply already large and consumption slowing into summer, price is often weak into June. Grains & Soy Complex Corn, wheat, and soybeans all tend toward weakness in May. For example, winter wheat harvest begins in May and continues into July, with the burden of new supply often pressuring price into deliveries against July - the first new-crop futures contract. But traders must not overstay their welcome: Wheat has been known to make a seasonal low in mid June. By mid May, the bulk of the corn crop is - or should be! - planted. With its own pattern of supply/demand by then well established, old-crop corn futures have tended to decline as deliveries against July futures approach. Will demand (ethanol and export) overcome such tendencies this year? US soybean planting reaches its midpoint by the latter half of May. Once it does so, the market focuses increasingly on new-crop at the expense of old-crop. Especially with South American soybeans entering the market, old-crop soybeans make a spring high and - barring weather problems and/or extreme supply tightness in July - begin a decline into deliveries. In contrast, soymeal has tended to rise from February into late June or mid July. US processors, anticipating less domestic consumption but more competition from South America, slow their rate of crush and the stream of new supply for this nonstorable commodity. Meats Accumulation of pork inventory tends to peak just as slaughter reaches its nadir in May, often exhausting the seasonal price rise. While production is low, those inventories are liquidated and pressure price. Cattle slaughter peaks May/June. When beef prices are weakest, demand for feeder cattle to replenish numbers begins a seasonal rise.