November 12, 2012
Get short and stay short…
Corn, Soybean Complex and Wheat
I will start with this 50 year chart. I think it presents an incredible perspective…and to me it suggests only one general course of action as a trader…
I encourage you to NOT just skim past this chart...Give it a good look.
I don’t know about you, but to me, this chart just SCREAMS, “Be Short!”. As always, this is just my own opinion, and I therefore may be dead wrong, but I ESSENTIALLY BELIEVE YOU GET SHORT AND STAY SHORT CORN, SOYBEANS AND WHEAT.
Over the next one to two years, I think you will see some version of what has followed all those previous bull markets going back to 1966 (and before), that is, a protracted and BRUTAL BEAR MARKET.
If my 32 years of experience are any guide, the ever so bullish rhetoric we have been hearing (“Demand is high. Supply is tight. We could run out of it!”) will be eventually be replaced by exactly the opposite, where, after currently unimaginable price declines, all you will hear is, “We have more than we will ever use!”.
Think back to what you were hearing this past summer…The drought was on. Headlines about crops burning up and supplies being severely depleted (particularly in Corn and Soybeans) were everywhere…like this thing would never end…Once the drought here subsided, you started hearing about bad weather in South America creating a potentially even worse situation…and even right now, dry weather is being cited here in the US as affecting the current wheat crops…We have had nothing but “weather scare” news for many months now.
And of course, the bullish media drumbeat about Chinese and Asian demand overwhelming these supposedly depleted supplies just goes on and on…to which I’d ask: Is this some big surprise or something? Surprises are what often creates price movement in commodities, not business as usual…and how much China buys, or is going to buy, has long ago been accounted for in the FUTURES markets.
The point is, ANYBODY WHO USES (BUYS) THESE COMMODITIES HAS BEEN LONG SINCE SCARED INTO COVERING AS MUCH OF THEIR FUTURE NEEDS AS THEY EVER POSSIBLY WOULD. Whether they are Chinese, African, European or whatever, if they are ongoing users of these commodities, all of the non-stop bullish talk has influenced them to buy the market…THEIR BUYING IS ALREADY IN THE MARKET. ALL THE REAL BUYING HAS BEEN DONE. My opinion anyway.
On the other hand, YOU HAVE A WHOLE WORLD, LITERALLY, FULL OF FARMERS/PRODUCERS WHO HAVE BEEN HEARING THE SAME ULTRA-BULLISH STORY, WHICH HAS LED THEM TO HOLD ON THEIR HARVESTS AS LONG AS THEY POSSIBLY CAN…LED THEM TO NOT SELL WHAT THEY HAVE TO SELL, SOONER OR LATER. In other words, they are all out there thinking prices are going higher and they are therefore, “waiting to sell when it gets up to…”, and, it’s NOT going to happen (again my opinion). More than likely, they will end up selling, en masse, 2 or 3 months from now with all of these markets then deep in the hole.
So here’s my equation for these markets….
SUPER HIGH PRICES + ALL THE BUYERS HAVE BOUGHT +ALL THE SELLERS HAVE SOLD VERY LITTLE = BIG BEAR MARKET.
No, absolutely all the buying has not been done, and there are certainly producers out there who have already sold a lot of their crop, but in general, I do believe the general set up is exactly as I have described it…The buyers have already stepped up…BUT THERE IS A MOUNTAIN OF SELLING WAITING IN THE WINGS.
And once these markets do get started on the downside (which may be happening right now as the last two days have seen Soybeans down 88, Wheat down 45 and Corn down 23) at some point all that producer selling WILL get started, and as is the NORM in this stuff, it could get very nasty, very quickly, and very big on the downside…As the markets start sliding, buyers just stick their hands in their pockets…while sellers get VERY, VERY nervous, when, for example, Soybeans they could sell two months ago for $17.50 (and didn’t do it) are now going for $14.50. Somewhere, farmers DO start panicking, and the resulting decline can sometimes be dumbfounding. As I am forever repeating, this is a mob psychology game and when it comes to determining a “fair” price, my experience is, more often than not, how high or low a market can go, and at what velocity it does so, doesn’t have to make any sense at all. This is the futures arena. The highest leverage there is…where ANYTHING can happen…especially in today’s overflowing-with-hot-money marketplace.
I AM SHORT AND STILL ADDING TO SHORTS, IN CORN, THE SOYBEAN COMPLEX AND WHEAT…I think bear markets in all three of these commodities are just getting started.
Here are the individual charts of these markets and a few recommendations…
HAVING SEEN IT TOO MANY TIMES BEFORE, I BELIEVE THERE IS A STRONG CHANCE EVERY ONE OF THESE MARKETS WILL MAKE NEW CONTRACT LOWS BEFORE THEY GO OFF THE BOARD. Too many times…REALLY…have I seen what are unthinkable prices become the reality…especially when it comes to bull markets that come to an end.
In Soybeans, do note that during the past 50 years, when they are collapsing, that is the perfect word for what they do…They go down a lot and it’s easy to think, “That must be it”,…then they go some more…and some more.
Take a close look...There ARE some very straight down moves on the 50 year chart…
A few final notes…
I do think this is an incredible situation, maybe one of the best set ups I have ever seen in this business…This obviously does not mean I will be right but I do look at option prices, and what I perceive as the potential profit multiples on the down side (what historical charts indicate but do NOT “promise”), and think, “Buy the puts…and if they lose…buy them again. When this happens, it will be VERY big. There is NO way these prices are staying at current levels…or anywhere near them. All those farmers who are so typically reluctant to sell when the markets are “Up” may easily find themselves selling their crops at HALF of current prices.”
And that is what I honestly believe. Again, I may be dead wrong, and if so, my perception that if you buy puts, and keep buying puts, may be a great way to lose a lot of money. But I obviously don’t think so or I wouldn’t be putting my name on this newsletter.
I THINK THIS IS AS GOOD AS IT EVER GETS. I WISH I COULD GET EVERY ONE OF YOU A PIECE OF THIS. AS ONE OF MY WALL REMINDERS STATES,” ONE GOOD TRADE IS ALL IT TAKES”, AND IT’S TRUE. EARLIER THIS YEAR, I THOUGHT SHORT TREASURIES AT 150 WAS THE BIGGEST NO BRAINER EVER IN MY CAREER, BUT I WAS WRONG. THAT, HOWEVER, DOES NOT PREVENT ME FROM FEELING THE SAME WAY ABOUT SHORT THESE THREE MARKETS.
And finally, if you are a farmer, and you are NOT using today’s prices to lock in SOME part of your 2013 AND 2014 production, I think you are missing a tremendous opportunity. Call me if you want some ideas as to actions you might take…As I so often repeat, because it’s true and I am morally obligated to do so, I may be dead wrong but I believe you may have seen the highs in these 3 commodities for MANY years to come. You’ve seen it before. This stuff goes up. Then it goes down…and it usually STAYS down longer than it stays up.
Thanks…I’m here. Give me a call. Do something with this.
The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Corn puts, Soybean Meal puts, Wheat puts.