Brent spot price which showed signs of cooling off has gained USD 24 from its recent low of USD 88 in six weeks.The crude which scaled to its historical high of USD 144 per barrel closed at USD 113 on August 7th, 2012. Last Friday, oil slipped as data from China announced decline in oil import in the month of July, and International Energy Agency lowered forecasts for 2013 by 400, 000 bpd due to weak global economy. On the other hand between June 24th, 2012 and July 20th, 2012 Brent gained 16% while wheat and corn gained 34% and 43%, respectively. The drought in US is the prime reason for out performance by Agro commodities clusters and monsoon failure in India too is a cause of concern, overall food inflation is expected to spike.
As per Food and Agriculture Organization (FAO) the situation is not so grim, in July report it says that stock ratios of cereal, coarse grain and especially, rice are better than previous year’s though wheat’s stock is low.We believe that despite FAO’s optimist note the commodities might still rally going forward. The following (Chart 1), looks at the re based prices of prominent commodities of energy, food grains, industrial metals and precious metals. We see that copper has been the top performer followed by gold, oil and wheat, and as highlighted all the commodities has converged thrice since 1982 and in all instances in was during some crises. Since last crisis,followed by momentary convergence, prices of all commodities diverged strongly but lately a whiff of convergence seems to be playing out with wheat outperforming others which might probably coincide with the next market correction.
The following chart (Chart 2) looks at the bushel to barrel ratio i.e. ratio of prices of wheat and crude oil since July 1982. The ratio is close to its historic low denoting that from price perspective wheat is trading at discount to crude oil. Moreover fundamentally, expected low wheat production combined with slowing of Chinese economy might push wheat further up.
