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Paragon Commentary

Future File: Wheat, Natural Gas, and Interest Rates

Feb 02, 2018

Wheat Market Rises

Wheat prices exploded higher this week as concerns mounted about dry conditions in the southern Great Plains. The hard red winter wheat crop in Kansas, Oklahoma, and Texas is in increasingly dire straits, with only 14% in good or excellent condition, according to a recent USDA report.

This caused Kansas City wheat futures to rise over $4.70 per bushel for the first time since August, and led to the highest one-day trading volume in history for the contract.

While the poor conditions are concerning many farmers, others have been using the futures markets to capture the now-higher prices. They expect that the crop will come out just fine, dismissing worriers with a common adage that stresses wheat’s resilience, “wheat is a weed.”

 

Natural Gas Volatile

Early this week, natural gas exploded to a one-year high as forecasts for an Arctic blast in February spooked the markets. This was especially concerning since current stockpiles of the fuel are nearly 20% lower than typical levels, creating a tight supply that pushed prices over $3.60 per million British thermal units on Monday.

Just a few days later, after updated forecasts projected less severe cold weather, the market bubble popped and plunged, dropping over thirty cents, capping off a wild week that reminded investors that wild weather markets can create immense risk and opportunities.

 

New Fed Chair, Same Interest Rate Outlook

On Friday, Federal Reserve Board Chair Janet Yellen stepped down and was replaced by Jerome Powell, who has served on the Fed’s Board of Governors since 2012. He will take over a Fed that has raised interest rates three times in the last year. The Fed projects that it will continue raising interest rates to more normal levels after almost a decade at near-zero rates.

For consumers, this will mean higher returns on savings accounts and other interest-bearing investments, but it will also spell higher borrowing costs, which could limit their ability to buy new cars, homes, or other goods. For this reason, higher rates can prevent inflation but also create a drag on the economy.

On Friday morning, government data suggested that the economy is doing fine on its own after a report showed strong job growth, rising wages, and new people joining the workforce.

This news knocked 10-year U.S. Treasury Note futures to a six-year low at 120-21. The futures markets move opposite of interest rates, signaling the markets’ expectations for a continuation of rising rates.

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