Equilibrium is a state where there is no incentive or tendency for any economic variable, for example, price to move. For any price to move it needs guidance on the direction to move. Like last week, the global commodity futures markets were waiting for the announcement from the Federal Open Market Committee (FOMC), US on the Federal Reserve?s intention on monetary stimulus for the US economy.
As is now well known, the FOMC at the end of its meeting announced that it plans to continue with the quantitative easing till the end of this quarter and maintain its low interest rate stance to promote a stronger pace of recovery. The quantitative easing by causing the dollar to depreciate is largely believed to have been the major factor behind the recent rally in commodity prices.
The Fed?s announcement was greeted with a continued rise in gold and silver futures with gold rising marginally more than silver last week (3% as against 2.81%) against their open prices aided by the depreciation of dollar as dollar depreciated by almost 1.71% against the euro during the week and the dollar index fell by 1.3%.
Crude oil got support from a weak dollar as WTI crude rose by 1.41% and brent crude rose by 1.23% during the week. Regardless of the rise in crude oil futures, the market?s skepticism about the expected growth in the United States and world economy was revealed in copper futures which fell by 5.2% over the week despite stronger American consumer durables data and a weaker dollar.
Copper?s use as an industrial metal makes it a subject of market?s interest and often reflects its sentiment on the growth prospects for the world. If they are well-functioning, markets have an in-built ability to correct themselves. If they are overpriced, prices tend to tumble and if they are under-priced, prices tend to move upwards.
Thus, despite a weak dollar wheat prices underwent a 7% correction over the week; corn prices underwent correction during the week but on a weekly basis rose marginally by 0.8%.
One of the ratios watched by the markets is the wheat to corn ratio. Historically, the wheat to corn ratio (ie the price of wheat to the price of corn) has ranged between 1.34 and 1.41. Last week, at the beginning of the week the ratio was 1.10 and by the end of the week it closed at 1.01.
The lower ratio from its historical levels is an indicator of the growing price of corn relative to that of wheat reportedly because of greater diversion of corn to ethanol.
The ongoing planting season and news about progress in planting provided the market with directional cues. The correction was noticed in soft commodity sugar as near-month benchmark sugar futures declined by 8.31% during the week.
The other soft commodity, cotton, continued on its southward march this week as well and near-month benchmark cotton futures declined by 5.6% during the week. The softs declined despite the weak dollar.
In the Indian commodity market, steel long futures fell by close to 0.3% during the week. Market demand for steel in India is expected to go up but there is no perception of supply shortfall.
Maize futures fell by more than 3 per cent during the week amidst increasing arrivals of rabi maize in the various mandis especially in coastal Andhra Pradesh.
Domestic wheat futures defied international trend with the near-month futures rising marginally by 0.6% during the week as there were reports of some delay in the harvest of the wheat crop in Punjab and Haryana because of the rains and lower than normal temperature in those regions.
Sugar futures in the domestic market increased by little more than 1% during the week, in contrast to the international trend.
(The writer is senior economist, NCDEX. The views expressed are her personal.)