Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Wheat and Corn Are Defying the Commodity Selloff
Transcript
- Lucas: So, the commodity conversation this week is all about oil ticking up and gold hitting another record. But if you're watching the grains complex, you've seen something else entirely — wheat up three-point-seven percent over five days, corn up eight-point-one percent, cotton up five-point-four percent. And this isn't a one-off blip. Luna: Corn jumping eight percent in five days? That's a big move for a staple crop. What's driving that? Lucas: Well, it's a few things lining up. First, there's the weather — parts of the Corn Belt have been drier than normal through August, and that's cutting into yield expectations. But the bigger story is demand. Ethanol blending mandates are getting stricter, and China has been quietly stepping up its purchases of U.S. corn and wheat. Luna: So it's not just the weather. You've got a demand side story too. Lucas: Exactly. And that's what makes this rally different. Traditionally, you see weather-driven spikes in grains that fade when the rains come. But the demand side is structural. China's hog herd has been rebuilding after African swine fever, and they need feed corn. Meanwhile, ethanol mandates in the U.S. are pushing more corn into fuel tanks. Luna: And wheat? What's the wheat story beyond the weather? Lucas: Wheat is more about the global supply picture. The Black Sea region had a rough harvest, and India's government has been buying aggressively to shore up its own reserves. So you have a tightening global balance, and the U.S. is the marginal supplier. That's why wheat futures are up three-point-seven percent this week even as the broader commodity index is flat. Luna: So the market is saying that grain shortages are more real than the oil glut. Lucas: Right. And you can see it in the data. The USDA's latest supply-demand report cut corn stockpiles to their lowest level in a decade. That's a fundamental shift, not a headline-driven pop. Luna: But here's what I keep coming back to — the CPI came in cool last month, the PCE is down. Inflation is cooling. So why are food prices, especially grains, still running hot? Lucas: That's the puzzle, and it's a good one. The headline inflation numbers are being dragged down by energy and used cars. But food inflation is stickier because it's supply-driven, not demand-driven. You can't crank up wheat production overnight. If the harvest is short, the price has to go up to ration demand. Luna: And that hits the grocery store, right? Bread, cereal, even meat because of feed costs. Lucas: Exactly. And that's why this isn't just a futures-market story. It's the kind of thing that shows up in the CPI six months from now. And it's also why the grain rally has been flying under the radar — because it's not as flashy as oil or gold. Luna: Well, it's flying under the radar of most investors, but not the smart money. I'm looking at the COT report and the managed money net long in corn is at a multi-year high. Lucas: That's a great point. The funds have piled into corn, and that can sometimes be a contrarian signal. But in this case, the fundamentals are backing them up. Luna: So what's the risk? What would break this rally? Lucas: The biggest risk is weather changing. If the rains come back, you could see a quick correction. But the demand story — ethanol, China, India — that's not going away. So even if we get a pullback, the longer-term trend is likely higher. Luna: And then there's the dollar. If the dollar keeps weakening, that makes U.S. grains more competitive globally. Lucas: Right, and that's another tailwind. The dollar is off its highs, and that's giving a boost to all dollar-denominated commodities, but especially ones where the U.S. is a big exporter. Luna: So, Lucas, if someone wanted to get exposure to this trend, what would you say? ETFs? Futures? Or just buy some real corn? Lucas: Well, I'd say do your research. There are ETFs that track grains, but they can be volatile. And if you're thinking about futures, you really need to know what you're doing. But if you just want to understand the economy, just look at the price of bread at your local store — that's the real-world signal. Luna: Speaking of real-world signals, one thing that's been interesting is how this grain rally is playing into the broader narrative of inflation. You mentioned the cool CPI, but the 10-year breakeven inflation rate is actually ticking up — it's at two-point-three-four percent now, up from two-point-three zero. That suggests the bond market is starting to price in more inflation risk. Lucas: That's a really important connection. The grain rally is one of the reasons why the breakeven inflation rate is rising. Food prices are a significant component of the headline CPI, and if grains keep going up, that's going to push inflation higher later this year. Luna: So the bond market is looking at the wheat fields and getting nervous. Lucas: In a way, yes. And it's not just wheat — cotton is up five-point-four percent, and coffee is down, but that's a different story. The point is, the grains complex is sending a signal that the disinflation we've been enjoying might be coming to an end. Luna: And that has implications for the Fed, right? They're trying to juggle a cooling economy with inflation that's not quite dead. Lucas: Exactly. And this grain rally is the kind of thing that could complicate their job. If food inflation starts to pick up, the Fed might have to keep rates higher for longer, even as the economy slows. It's a tough spot. Luna: Let's take a step back. We've been talking about grain prices as a signal, but for a lot of our listeners, they're just trying to figure out what to make of the market today. The Dow dropped 700 points, Walmart missed on outlook, and yet commodities are still moving. What's the big picture? Lucas: The big picture is that we're in a bifurcated market. Stocks are jittery because of the earnings outlook and the Treasury mess, but commodities are reflecting real physical supply and demand. And grains are the clearest example of that. Luna: So if stocks are about sentiment, commodities are about fundamentals. Lucas: Right. And right now, the fundamentals are bullish for grains. As long as the weather doesn't cooperate and China keeps buying, this rally has legs. Luna: And I think that's a great segue into something we hear from listeners all the time: 'How do I make sense of all this?' And honestly, walking through the economy with you, Lucas, is the best way I know to make sense of it. If you're one of those listeners who's found that this show has helped you connect the dots, we just want to mention — you can support us at buy me a coffee dot com slash fexingo. It's a small way to keep the show ad-free and independent. Lucas: Yeah, and we really appreciate it. It helps us keep doing what we do, diving into the stories that don't always make the front page. Luna: Anyway, back to the grains. So, Lucas, what's the one thing you want our listeners to remember from today's episode? Lucas: The takeaway is that grains are the new barometer for inflation. If you want to know where the CPI is headed six months from now, watch the wheat and corn futures. They're telling you that food prices are going to be a problem. Luna: And the weather, and China, and ethanol — all playing into that. It's a complex story but one that affects everyone's grocery bill. Lucas: Exactly. And it's a story that's still unfolding. So we'll keep an eye on it. Thanks for joining us.