About The Author

Alan Brugler

We like to think that markets are rational, and that a certain supply/demand balance results in a certain “fair” price for the commodity, stock, house or gallon of milk. However, we also know that isn’t entirely true.  Panic, fear and greed drive markets away from fundamental value, and that value itself is constantly shifting as new information becomes available about supply or demand components in the present or future tense.  Markets also don’t exist in a vacuum. They are competing for buyers and sellers with other markets and other uses for money. Sometimes, prices will act in tandem with other markets because they have a common underlying influence.  Other times, we have to remember that the connection may be spurious, that “correlation does not mean causation”.

As we look at price action in the markets heading into Thanksgiving, is there evidence of fundamental drivers?  Or can we blame price action on the other guy?  Let’s look at correlations between markets as measured by Moore Research over the past 60 days.  This table utilizes nearby futures contracts and has been modified from its original format by deleting rows and columns to make it a little more readable.  You may still need to use the magnifier function on your PDF reader, or “pinch out” on your cell phone or tablet!

We often attribute ag price movements to changes in the value of the dollar, as that impacts export affordability in buyer countries, and by definition a weaker dollar means more dollars per unit of value if the S&D doesn’t change. Look at the DXZ23 line below, which has 2 red boxes on it.

The correlations in the table run from -100 (the pair act in opposite directions) to +100 (they reliably track the same direction over the past 60 days).  We see that the DX is strongly negatively correlated with the euro and British pound, as it should be.  Those are two of the largest components of the dollar index.  It is also negatively correlated to the stock market AND the Treasury market over the past two months.  Those are the first 7 columns on the left side of the table and -67 to -87 correlations. By inference, a weaker dollar has meant higher T-Bond and T-Note prices which in turn mean lower interest rates. As interest rates drop, there is less interest in owning dollars vs. other currencies that might have a higher yield.  Lower rates have also correlated well with higher stock market indices during this period.

How about the ag commodities?  The last 6 columns at the right are wheat, corn, the soy complex and cotton.  The weaker dollar is inverse to wheat and particularly soybeans over the past two months. The -80 says lower DX has often been paired with higher Jan bean prices.  For a really tight fit, look at soy oil vs. the Japanese yen (JYZ23). The JY runs opposite the DX just like the other currencies discussed earlier. A stronger JY has had a .91 correlation with higher soy oil prices during this window.

Let’s get away from the currencies. Another common investing theme has been ag commodities as fuel molecules. Can the energy futures support or detract from corn and soybean prices?  More than a third of the corn crop detours through an ethanol plant, and well over half of the beans are crushed for soy oil . The columns for the energies are under the word Correlations in the table (CL, HO, RB). The correlations are weakly negative for the soybeans and weakly positive for corn and wheat, in the 20’s and 30’s. Bean oil is a more direct play as it makes up about 50% of the renewable diesel feedstock. That is reflected in the correlations, which firm up into the 50’s for BO vs. CL, HO and a surprisingly even stronger match with gasoline (RB) at 83.  In case you are wondering why cotton and crude oil have been heading in the same direction (.76) over the past 60 days, you just have to remember that cotton’s main competition is synthetic fiber, and most of those are made from crude oil byproducts.

So what are some of our conclusions?  Using this 60-day sample, a weaker dollar has tended to match with higher grain prices, but the connection is tenuous. Japan is a major importer and moves in the JY are worth watching.  For both, it is worth remembering that a 5% move in the currency in a year is a huge move, while corn and soybean prices can move 20-30% or more in a season just on yield and production variation. Currencies tend to have a bigger impact outside the growing season, when exports are a bigger driver of balance sheet changes. Prices for the grains really aren’t acting like fuel is their main business, but crude and diesel prices have been more strongly correlated with bean oil.  Meal/oil and oil/meal spreading likely dulls the impact on soybeans because their value is the sum of the two. The stock market may pull money away from commodities when it is rising, but any impact on commodity prices is weak at best.

Finally, this SRR only looked at the correlations over a 60-day period. For some markets, those look very different over a 30 or 180 day window. Actual fundamental news differences can drive “vacations” away from even the strongest price relationships.


Alan Brugler

Brugler Marketing & Management LLC

Phone: 402-697-3623 Cell: 402-415-3871

There is a risk of loss in futures and options trading. Past performance is not necessarily indicative of future results.

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