Gulke: What's Causing All the Volatility in Commodity and Financial Markets?

For the week, May corn was 1¼¢ higher, December corn lost ½¢ and May soybeans dropped 11¢. November soybeans lost 8½¢, May soybean meal was up $11.30 per short ton and May soybean oil fell 300 points. May Chicago wheat was 11 ¼¢ lower, May Kansas City wheat was up 7½¢ and May Minneapolis wheat lost 5¼¢. December cotton was down 253 points and June DOW futures lost 963 points. 

It was another interesting week in the markets with increasing volatility in the commodity complex and the stock indices. Where is all the volatility coming from?  Jerry Gulke, president of the Gulke Group points to a couple possible clues. 

The April WASDE was a disappointment as Gulke says USDA failed to make some key adjustments to the supply and demand tables. First, the 50-million-bushel drop in U.S. corn ending stocks failed to account for the disappearance in the Quarterly Stocks Report. 

However, USDA also kicked the can down the road on the South American crop leaving Brazil corn production at 124 million metric tons, 13 million above Conab.  They also left Brazil soybean production at 155 million metric tons verses Conab’s 146.5 million.

USDA punted on Argentina’s soybean production leaving it at 50 mmt. The agency did lower their corn estimate by 1 mmt, but the Rosario Grain Exchange cut the crop 6.5 mmt to only 50.5 million.

Gulke says this is a big divergence. 

“Some people are going there that are boots on the ground and are saying yes, we have a problem in Brazil and now we have issues in Argentina with disease and insects,” he says. “At some point in time, we’re going to find out that I’m wrong, other people that are commenting on it now are wrong and USDA was right. Or USDA is going to have to bite the bullet somehow and say yeah, the crop turned out to not be as good as we first thought.”

So, when will USDA rectify this discrepancy? Gulke says it’s hard to know, but USDA officials have told him they aren’t in the business of speculating. So, he thinks they’re scared to make a prediction without hard evidence.

However, he says, if he is right, “What did it cost the American farmer? Because price discovery wouldn’t have pushed the prices to lows we saw at the end of February.”  

Gulke says volatility is also coming from the plunge in the stock market which is down nearly 1,900 points the past two weeks. He says the charts were providing sell signals or a correction back in February, and now it is finally coming to fruition. The uncertainty of a Middle East war and thoughts that interest rates will stay higher for longer due to stubborn inflation are also factors. 

As a result, traders and investors are liquidating their positions, and that is spilling over to the commodity sector. It is part of the reason the grains rallied Friday and the livestock, metals and other softs melted down. 

So how much of a correction does Gulke expect in the Dow Jones Industrial Average? He says there is likely more to come as nervous investors take profits and either head to the sidelines or look for other bargains or safe havens in the market. 

“Any time you have a move higher 50% of the time, you’re going to get a 50% correction, 60% of the time you’re going to get a 38% correction and a third of the time you’re going to get a two-thirds correction,” he says.

With money coming out of the stock market, will it look for a new home? Could it move into the grain markets and produce a rally and fund short covering? Gulke says it might be too early to tell.