Chicago's commodity markets appear poised to separate the wheat from the calf.
Commodities often move together, and natural resources of all kinds have enjoyed a long bull run, thanks to support from China and other emerging-market countries. But some recent developments should continue to support grain prices, while meat and dairy contracts falter due to overbreeding of livestock, veteran traders and analysts say.
Among the new factors supporting grain: President Bush's recent pledges for increased U.S. reliance on alternative fuel sources, including ethanol that can be made from crops such as corn. The administration's policy pronouncement is lending support to the commodity even in the face of skepticism about whether alternative fuels will ever gain wide usage.
"You've had some ethanol usage already in the U.S., but the possibility of much wider distribution is a new thing for these markets," says analyst Vic Lespinasse, of A.G. Edwards & Sons Inc., citing speculative buying by commodity funds recently.
Agriculture Department data also show strong purchases of corn by Mexico and Japan. Data from the federal agency last week projected that corn stockpiles this year will climb to 2.4 million bushels, a figure slightly ahead of analysts' expectations and one that raises concerns of oversupply.
Yet grain prices at the Chicago Board of Trade are still going strong. From their January lows, wheat contracts are up nearly 8% to $3.48 a bushel, corn contracts are up more than 7% to $2.2075 a bushel, and soybean futures have risen more than 3% to $5.8425 a bushel.
Meat and dairy markets, meanwhile, have lost ground in moves that many analysts say takes a page from the Commodities 101 textbook. Analysts say high prices in recent years for most of those commodities have encouraged farmers to overproduce, which could lead to a down cycle that lasts up to four years.
"In particular, the cattle herds have really expanded the last few months," says analyst Morgan Paisley, of Alaron Trading Corp. "Hog farmers are going through a cycle, too, but it's not as pronounced."
From their January highs, cattle futures are off more than 7%, or 7.45 cents, to 89.1 cents a pound through yesterday's trading on the Chicago Mercantile Exchange. Ongoing wrangling over Japan's ban on imports of U.S. beef, due to fears about mad-cow disease, has also hurt prices, Mr. Paisley says.
Other meat and dairy futures have been in a slump since modest rises in early January. Milk futures are off more than 13%, butter contracts are down more than 10%, pork-belly contracts are down more than 9%, live-hog futures are off more than 3% through yesterday's trading at CME.
Jeff DeGrand, managing partner at the dairy brokerage Downes-O'Neill LLC, estimates that dairy products are in the early stages of a 12- to 18-month bear market because of heavy production on the heels of recent prices near historic highs.
"The pendulum is swinging back in the other direction now," Mr. DeGrand says.
In other commodity markets:
GOLD: Prices on the Comex division of the New York Mercantile Exchange extended recent losses as selling momentum from last week persisted. February gold fell $11.20 to $539 an ounce.
CRUDE OIL: Futures set a settlement low for this year as rising inventories overshadowed fears of disruptions to foreign oil supplies. The March contract on the Nymex settled 60 cents lower at $61.24 a barrel.
