Macro Factors Driving Agricultural Commodity Prices (For Now)

August 4, 2022

Prices of agricultural commodities—in one of the strange plot twists of the current economic crisis—are unmooring from market fundamentals and instead tracking macro investment instruments such as currencies, Treasuries, and crude oil, according to an analysis by Gro Intelligence.

Several recent commodity price moves have been counter to what market fundamentals would suggest (see charts at the bottom):

  • Wheat prices, for example, have completely erased any “conflict premium” associated with the war in Ukraine, despite no signs of a resolution to the conflict.
  • The price of corn has moved rapidly from over $8 per bushel to less than $6 per bushel, despite Gro’s models predicting one of the weakest US corn harvests in years as soil moisture levels near a 12-year low in corn growing regions. 
  • Other commodities, such as soybeans and milk, have demonstrated stronger correlations with macro trends than in the prior five years.
  • Meanwhile, China’s demand for grain imports is at all-time highs, with imports so far this marketing year running at slightly higher levels than last year’s record, despite China’s COVID lockdowns and an overall economic slowdown. (See here.)
  • Declining commodity prices have reduced food import costs. An analysis of data from the Gro Platform shows that the top 20 importers of grains, oilseeds, and vegoils are paying collectively $69.7 billion more annually as of August 2 than they were at the start of 2020. That’s down from a peak reached on April 29 of nearly $125 billion above the 2020 level. (See a chart of this analysis at the bottom of the article.)

A Gro analysis of these and other recent commodity price moves suggests that macro trends, primarily Treasury yield moves, have overwhelmed market fundamentals as correlations between commodities and Treasury markets have risen.

Macro funds, which had been positioning themselves for an inflationary environment since the start of the year, in May started unwinding these trades, with knock-on effects for agricultural commodity markets.

(See a chart displaying Gro’s full analysis at the bottom of this article.) 

Gro analyzed the relationships among multiple agricultural commodities, including wheat, soybeans, corn, and milk, as well as the yield of the 10-year Treasury, crude oil, and gold.

Our analysis showed that since January, the R-squared — a measure of how much the change in one variable can be explained by another variable — among these various commodities has increased significantly against the prior five-year period (with the exception of the price of gold, which is generally bought as an inflation/recession hedge).

In particular, the relationship between commodity prices and Treasury yields has strengthened from an R-squared of 0.24 to 0.33, indicating that more of the move in commodity prices can be explained by changes in Treasury yields.

Further analysis of data from the Gro Platform shows that there are very few managed money positions that are short commodities, such as wheat and corn. Short positioning and any covering of those positions can act as a braking mechanism for downward movements in price.

Despite continued macroeconomic uncertainty, a return to more normal market positioning will push agricultural commodity market fundamentals to eventually reassert themselves as commodity price drivers.

And while food importing countries are currently benefiting from lower food import costs, this trend could reverse once agricultural market fundamentals regain prominence.

The top chart above displays the R-squared between different commodities using daily commodity price data pulled from the Gro Platform since the start of 2022. The closer the R-squared is to "1", the more the change in one commodity can be explained by changes in the other. Green indicates relationships where the R-squared has increased, meaning that the relationship has strengthened versus the prior five-year period. Red indicates a weakening of the relationship. The middle chart displays the R-squared between these same commodities from January 2017 to December 2021.
Food import costs fell as commodity prices declined in recent weeks. For the top 20 importers of grains, oilseeds, and vegoils, annual import costs as of August 2 were $69.7 billion more than they were at the start of 2020. That’s down from a peak reached on April 29 of nearly $125 billion above the 2020 level, according to an analysis of data in the Gro Platform.