Commodities Play Defensive

From the Desk of Ian Culley @IanCulley

Have you noticed commodities are breaking out?

No, not crude oil or copper. I’m talking about sugar, live cattle, and soybean meal.

Though these contracts rarely find themselves on the front page, their upside resolutions provide an important commodity-trading roadmap heading into 2023. 

Plus, their relative strength reveals insight into the underlying nature of the current market environment.

Check out commodity subgroup performances anchored from Sept. 26, when  the US Dollar Index $DXY peaked:

I chose to anchor from this date for two reasons: to highlight the trailing three months and to show how a weaker dollar tends to benefit commodity prices.

One might expect the entire commodity space to post positive returns since the dollar peaked in the fall, especially since the USD remains weak. But that’s not the case.

Instead, the trailing returns since Sept. 26 reveal a bifurcated landscape pointing toward a broader risk-off tone. 

Livestock and precious metals have posted returns near 8%. Meanwhile, grains and softs are hanging around breakeven. These are your classic defensive areas in the commodity space.

Precious metals often act as a flight to safety (except when they don’t), and agricultural contracts are far less sensitive to economic conditions than crude or copper.

On the flip side, procyclical areas such as energy and base metals have dropped more than 7% and 5%, respectively. These contracts are associated with economic growth, providing the raw materials that fuel “progress.”

I don’t think we need to overcomplicate the defensive leadership beyond relative strength.

Our long sugar, live cattle, and soybean meal trades are working. And, in the coming weeks and months, I believe grain markets and precious metals will provide excellent buying opportunities.

I think we’re best served to focus on the winners across the commodity space as we head into the new year.

Stay tuned, and have a wonderful holiday season!

Merry Christmas.

COT Heatmap Highlights

• Commercial hedgers continue to hold one of their smallest net-short positions for crude oil in three years.
• Commercials lightened their long exposure to coffee, dropping almost 4,000 contracts this week.
• And commercial hedgers' short position for soybean meal nears a historical extreme.

Click here to download the All Star Charts COT Heatmap.

Thanks for reading! As always, please let us know what you think.

And be sure to download this week’s Commodity Report below!