Droughts propel commodities to food-riot prices

Grain prices have surged over the past six weeks as drought-like conditions have raised concerns about the health of the summer crop. Soybean prices have moved to a new all-time nominal high, having increased nearly 50% since late 2011 and 20% in the past six weeks.

Corn is also approaching record highs with prices up 40% since the beginning of June. With global grain inventories at historical lows, the heat in Canada and the U.S. Midwest has resulted in extreme prices moves.

Read: Commodities investing: no longer straight up

Is the price increase for corn and beans justified? The current price increases are working their way into the food chain and, if the pressure lasts, it will likely impact inflation, especially in emerging economies. We have returned to the price levels seen in the 2007-08 crisis that sparked food riots in some 30 countries.

Ultra-low interest rates continue

Carney wants to raise interest rates, but he refrained from doing so again last week.

The Bank of Canada lowered its outlook for growth for the balance of the year and also lowered their forecasts for energy and base metals prices. These are Canada’s key exports and the cuts were made due to weaker global demand.

Read: Canadian economy losing momentum: BoC

In the U.S., Chairman Bernanke’s assessment of the economy was downbeat as he cited the economic problems of Europe as the root cause. Were it not for Europe, however, he might have sounded sanguine on the domestic U.S. economy. His remarks fell well short of calling for QE III, at least for the moment.

Once again, the weekly economic data was mostly on the softer side. June’s U.S. retail sales contracted for the third month in a row as limited employment gains are taking a toll on weary consumers. The Fed’s Beige Book said U.S. activity remained modest in June and early July. Weekly jobless claims moved higher by 24,000 to 386,000.

Canadian stocks have made gains in five of the last six sessions. The big movers were Energy related stocks as the recent hot weather has pushed up demand (and prices) for natural gas.

WTI and Brent crude have also surged 20 percent higher from their lows in June. The U.S. dollar softened last week against its global currency peers and the Canadian dollar rallied through, but could not hold, the $0.99 level.

Recovering oil and gas prices helped push our petro-currency higher, but June’s weak inflation report kept our currency in check.

Read: Are oil prices too low?

Sure enough, European concerns resurfaced once again. This time it was Spain’s 10-yr bond yields surging above the key 7% threshold just as the EU gave final approval on the Spanish bank bailout. That’s the same yield level that prompted bailouts for Greece, Ireland, and Portugal. Gold ended the week lower on the Spanish debt concern.

TRADING WEEK AHEAD

U.S. earnings season continues and Canadian corporate reporting picks up momentum with several key bellwethers due to report their second quarter results.

Ten Dow Industrials and 172 S&P500 companies report in the coming week. With approximately 20% of U.S. companies having reported thus far, two thirds have beat bottom-line earnings expectations.

Unfortunately, top-line revenues and forward-looking guidance has been below expectations and far weaker than we have seen in recent quarters.

Key Canadian energy, mining, and industrial names begin to report next week and their results will likely show how much they were impacted by the falling energy and metals prices in the quarter due to slower global demand.

This week’s key economic data is mainly from south of the border. Wednesday’s New Home Sales for June should show an uptick, potentially marking the highest level in home sales since tax credit expiry in April 2010.

Housing has been making a very slow climb back from its recessionary lows, but volumes still remain well below the long-run monthly average. On Thursday, June’s Durable Goods Orders is expected to be soft, marking the fourth drop in the last six months.

Friday’s read on second quarter GDP should show the slowest quarterly rate of expansion in a year and would mark the fifth sub-2% quarter in the last six. This sluggishness in Q2 means GDP would have to speed up to 2%-3% in the second half to be consistent with the Fed’s current central tendency range of 1.9%-2.4% for this year.

In Canada, May’s Retail Sales data should show a rebound from the April decline as auto sales have rebounded this spring.

David Andrews is the Director, Investment Management & Research at Richardson GMP in Toronto. This team of research experts is responsible for monitoring and interpreting economic, geo-political situations, current market environments and trends. @David_RGMP