January 13, 2019
Last year, with the tariff war beginning to escalate, the month of June saw an across the board collapse in crop prices here in the USA. In the space of six weeks, Soybeans dropped $2.00, while Wheat and Corn both dropped about 70 cents...After the selloff, Wheat experienced an almost immediate $1.00 weather market rally but is now back on its lows, the end result being that all three markets have basically been trading sideways in relatively tight ranges for the past 7 months...And just telling it like it is, as I am always an options buyer, sideways is the last thing I want to see as it usually means losing money…which, after a great start last year (Short Bonds, Gold, Corn & Soybeans) is exactly what we have been doing for the past 5-6 months…Losing money while after having reversed to be primarily long Corn and Soybeans…
Nevertheless, my focus going into 2019 is based on my belief that the current prices for Corn, Wheat and Soybeans, have been kept down at ARTIFICIALLY LOW LEVELS, due to the Trade War (which I sense is ending), and that the NEXT six months are going to be exactly the opposite of what we have seen since last summer…that is, PRICES WILL BE LEAVING THESE CONSOLIDATIONS AND MOVING SHARPLY HIGHER.
I AM AN AGGRESSIVE BUYER, HERE AND NOW, OF SOYBEANS, CORN AND WHEAT.
The first three charts below provide a glimpse of what last summer’s collapse and the months ever since have looked like in these three markets…And I should note that I DO find it significant that even with the acceleration of the trade war, AND in spite of the 20% drop in Stocks AND the negative implications of the 40% drop in Crude Oil? That in spite of all the economic fear and uncertainty as 2019 is beginning, Soybeans and Corn are basically on their highs for the past 7 months? I think this speaks volumes about the underlying strength and imminent potential upside for both of these markets…I mean, if they have essentially been firming in the face of all that bad news, what will they do when the atmosphere improves…which I absolutely believe is dead ahead in front of us…
The sharp breakdowns here were when the tariffs really started heating up…But then observe we are NOW pushing new six month highs…
Here as well…
OK…The big story has been that China stopped buying our Soybeans, which dragged Corn and Wheat down as well, but as can be seen on the next three charts, WORLD DEMAND FOR ALL THREE COMMODITIES IS HITTING RECORD LEVELS…AND THAT EVEN THOUGH THE TRADEWAR MAY HAVE RESULTED IN A TEMPORARY PSYCHOLOGICAL SELL OFF IN PRICES HERE…THE FACT REMAINS THAT IT DOESN’T MATTER WHERE, FOR EXAMPLE, THE SOYBEANS COME FROM, THE PLANET STILL IS GOING TO NEED EVERY BUSHEL IT CAN FIND…WHICH, I WOULD ADD, IS ESPECIALLY TRUE FOR CHINA, WHICH GOBBLES UP FULLY 30+% OF THE WORLD’S SOYBEAN SUPPLY.
THE POINT IS, TRADEWAR OR NOT, ALL OF THE SOYBEANS WE GROW WILL BE NEEDED TO SATISFY WORLD DEMAND. WITH PRICES CURRENTLY BELOW THE COST OF PRODUCTION, I SEE NOWHERE FOR PRICES TO GO BUT HIGHER.
Here are the long term charts…
Note that in all three of these markets:
BIG MONEY BULL AND BEAR MOVES ARE ROUTINE. THESE MARKETS ARE INHERENTLY VOLATILE.
ALL THREE HAVE BASICALLY BEEN SIDEWAYS FOR THREE YEARS, and are, I believe, LONG overdue one of those big moves…Especially in today’s financial atmosphere where massive financial flows have resulted in GIANT stock and commodity moves having become commonplace, as in, for example, the recent action in Stocks and Crude.
A few more points before getting in to specific trade recommendations…
ONE - The United States IS the largest Soybean producer on the planet. Aside from the fact that we are major consumers, the USA also supplies 37% of the world’s Soybean exports, making us 2nd to only Brazil, which provides 44% of the world’s exports…Total it up and you get 81% of the world’s single largest source of vegetable protein coming from two countries, Brazil and the United States.
TWO - One more time, China is the world’s biggest consumer of Soybeans, consuming 30+% of the world’s supply. And they CANNOT meet their needs without buying from the USA. Any suggestion that they are gone as customers is absurd.
THREE - And finally, prior to the tradewar, the USA was China’s number one supplier of Soybeans (representing about 60% of our Soybean exports).
Those three points (facts) add up to one thing. CHINA MIGHT HAVE BEEN ABLE TO TEMPORARILY FIND THEIR SOYBEANS ELSEWHERE…BUT THEY CANNOT DO SO PERMANENTLY. THEY WILL BE BACK (and already are really). The USA does represent 37% of Earth’s Soybean “pie” and there is NOWHERE ELSE FOR THEM TO GO.
Then, when you throw into the mix that the past years’ price collapse has almost certainly put some USA farmers out of business, AND, with prices still under the cost of production, perhaps leading to banks being reluctant to make loans for this spring’s planting, the possibility of reduced planted acreage this Spring certainly could become a reality.
And finally…The Weather…It IS changing. It IS erratic. And whether the result is too much rain, or too little rain, or too cool, or too hot, or whatever…, ANY deviations from whatever the norm is can mean planting delays, or flooded crops, or drought losses, or lowered yields, or harvesting delays and so on…ANY of which could light a fire under what I already think is an already potentially volatile situation.
I actually think we’ve been through the worst as regards the tradewar thing…that all of its damaging effects have months ago been accounted for by the market (which is why they’ve been climbing and firming)…And this may be naïve, but I honestly don’t think there is anywhere to go but higher from here.
And I would also add, my guess is that China knows this as well…that China KNOWS what their presence means to the ag markets, and with this in mind, I think it is a safe bet that the Chinese have been steadily, and “stealthfully”, buying futures in all of these markets, down here at a straight up 20% discount, for as far out as they can. I mean, why wouldn’t they? Wouldn’t you? And taking it a step further, why in the world, when they are the biggest end users on the planet, would they telegraph that they are doing so? Really. I can’t imagine that they wouldn’t already have been doing their buying for 2019 and 2020 via our futures markets. Again, why in the hell wouldn’t they?
Meanwhile, due to the current bearish tradewar atmosphere, all I’ve been hearing, for MONTHS, is ag adviser after adviser, over and over, recommending that farmers forward sell their crops, even out into the 2020 crop year (which I think is ridiculous), which I can only view as bullish in the sense that lots and lots of selling, that normally would have come far out in the future, ALREADY has been done…
Here are the numbers and what I would do here.
Final notes…I’ve basically been doing research for the past 6 weeks…trying to figure out where the money is during 2019…I have some other strong idea but this is absolutely my top pick. I might eat the words later, but I really see owning these markets here (as always, using the both sides strategy) as very much of a no brainer…I say these market WON’T just sit here. And if I’m wrong…if they tank from here, the 2 & 1 thing WILL take care of me. And if I am right, I think I am going to REALLY be right. Like I’ve been saying, EVERYTHING SEEMS TO BE MOVING BIG LATELY.
As always, for sure, I might be dead, dead wrong…but I would almost say I just can’t imagine any scenario short of a total world economic meltdown (and I still say we are in something that is very much the opposite) in which these three markets go lower…The truth is, the charts above all look like bottoms to me…You never know until after the fact, and nothing about anything in the futures markets is absolute, but after easily having looked at a million charts during my 38 years in this stuff, ALL THREE OF THESE MARKETS DO LOOK LIKE THEY FOUND SOLID VALUE AND HAVE BOTTOMED…And from here, the only question I currently have is, how soon…how fast…and how big will they go.
I think this is a fantastic bet…though obviously, like all this stuff, not without risks…Like I said, I think it is quite likely that the Chinese are quietly buying the hell out of all three markets here…And so am I.
Give me a call if you want to know more. Frankly speaking, I am jacked up about this idea…to the extent that I am even entertaining the use of straight up futures contracts as well…which I actually hate the thought of…but I do see this as a monster opportunity.
Happy New Year.
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Corn, Soybeans, Wheat