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WALL STREET, CALIFORNIA | ODD LOTS / TOM PETRUNO

Reaping What They Sowed : Commodities Traders Tripped Up by Overconfidence

November 05, 1996|Tom Petruno

Whoever said "All glory is fleeting" must have known something about commodities.

The spring and early-summer surge in prices of grain and other key commodities, which lifted widely followed commodity indexes to seven-year highs, has completely reversed itself.

Grain prices, which rocketed in spring as commodity traders focused on what appeared to be dangerously low global stockpiles, have plummeted over the last two months with the realization that this year's U.S. crop harvests will be good to excellent.

Indeed, despite a wet Midwest spring, the weather cooperated in summer and so far in fall, producing bumper crops in wheat, corn and soybeans.

Result: The December wheat futures contract on the Chicago Board of Trade, which had rocketed as high as $6.32 a bushel in spring, has plunged to $3.80 now. Corn futures, $3.69 a bushel at the start of the year, are at $2.62 now.

To put it in stock market terms, wheat's plunge is the equivalent of the Dow Jones industrial average falling from its current 6,041.68 to about 3,625.

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And the grains aren't the only nightmare for the bulls in Chicago and New York commodity trading pits this year. Prices of many industrial commodities, including copper and silver, also have slumped. Copper, at $1.26 a pound at the start of the year, is around 94 cents a pound now. Silver started the year at $5.21 an ounce and is at $4.79 now.

Meanwhile, crude oil--perhaps the biggest commodity surprise of 1996 as prices have jumped to the highest levels since 1991 on tight world supplies--has finally begun to weaken in recent weeks.

Commodities' broad price weakness has dragged the Commodity Research Bureau, or CRB, index of 17 key futures prices down 10% from its spring peak, to 236.52 as of Monday, lowest since August 1995.

Where did the bulls go wrong? Same old story: After hefty gains in grain prices in 1995, some futures traders got way too greedy. They believed the bullish grain story to be unassailable. World stockpiles were thought to be so low that even huge U.S. crops couldn't deflate prices significantly.

Wrong. Ray Worseck, economist at brokerage A.G. Edwards in St. Louis, notes wryly that free markets have a way of fixing supply and demand imbalances.

"The history of commodity markets, and particularly grains, has been that if you have a dramatic run-up in prices, you 'do the job'--you ration out users, and you send signals to other parts of the world that it would be a good idea to produce more," Worseck said.

Australian farmers, for example, quickly got the message: Australia announced Monday that its wheat crop should come in at 21 million tons this year, up from the previous estimate of 20 million. Farmers in Europe and South America also have responded to higher prices by planting like crazy.

Of course, what is bad for commodity bulls--falling prices--is good for stock and bond investors, insofar as lower commodity prices help keep a lid on inflation. It's not a coincidence that bond yields have fallen to seven-month lows in recent days as the CRB index has hit new 1996 lows.

Even though commodity prices are up from their dirt-cheap lows of 1992, the CRB is no higher now than it was in 1989--which tells you something about why inflation has been so tame in the 1990s. Whenever commodity markets get too tight, new supplies seem to emerge from somewhere.

But from the stock market's point of view, lower commodity prices are good news only to a point. As Worseck notes, recent weakness in industrial metal prices conveys a message about the persistent weakness of the European and Japanese economies. If those economies don't improve in 1997, it won't be good news for the U.S. economy or many U.S. companies' profit outlook.

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Americans have been stashing more savings in the bank in recent weeks, raising suspicions that people are growing more cautious about their hitherto favorite cash repository: stock mutual funds.

The total of small time deposits--certificates of deposit under $100,000--at U.S. banks and savings institutions has been growing meaningfully since late July, reaching $941.6 billion as of Oct. 21, the latest data available from the Federal Reserve Bank of St. Louis.

That's up from $929 billion in mid-July and marks the first significant growth in CD totals since the fall of 1995.

Also growing: regular savings accounts, which include bank money market accounts. They now total $1.25 trillion, up from $1.23 trillion in late September.

It can't be the yields that are attracting people. Banks and savings institutions have been ratcheting their rates down with the general decline in interest rates in recent months. The average yield on one-year CDs nationwide is 5.06% currently, down from 5.09% as of Oct. 6, according to Bradshaw Financial Network.

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