Monday, August 24, 2009

Grains: Asset Class Review

Recent asset class reviews have focused on industrial metals, U.S. Treasuries, and crude oil, gold, and the U.S. dollar. Now we're taking a look at three grains: corn, soybeans, and wheat.

Note that all three dropped dramatically during the financial crisis, along with commodities overall. Wheat actually topped out first and has been the weakest of the group, reflecting large global stocks. Corn spiked higher than the others in 2008--in part due to its cachet as a potential biofuel--but dropped by more than half during the crisis. Soybeans, also a candidate source for biofuels, has been less volatile both to the upside and downside.

Interestingly, these grains bottomed ahead of stocks and moved higher from late 2008. Wheat has since made new bear market lows (unlike most commodities), and both corn and beans are notably off their recent highs.

Both as a fuel story and as a foodstuff, grains respond to economic expectations. Their bounce from the 2008 lows has not been impressive as a whole, and they are currently reflecting new weakness relative to other commodity groups. This is consistent with a weak economic recovery, and it is consistent with a benign inflationary outlook with respect to food prices.