May 9, 2006
The current climate in commodities is unquestionably hot, led by the unbudging energy sector...with inflationary expectations everywhere...and everything being pushed by billions of dollars in hedge fund money now devoted to the futures markets. While I still cannot bring myself to jump on the precious metals, energies or copper bandwagons, I do see one commodity area I believe is on the verge of becoming the next big bull market story...that being the four major export crops grown right here in the USA---Corn, Wheat, Soybeans and Cotton.
Production costs for all these commodities have been soaring, directly attributable to energy prices, while worldwide demand is running at record levels in just about all of them as well. As always, throw in the potential for weather problems, whether here in the US, China, South America, India or anywhere...and I think you have a set up that argues for potential roaring bull markets in any or all of them. The truth is they all have different stories to back up either a bullish or bearish case so I'm not going to waste your time with a lot of fundamental reasons that fit what I believe. I'll just say I think it makes tremendous sense to buy call options in all four of the these markets and bet that one, some, or all of them will "go" over the next 6-7 months (to begin with).
Though "sideways" has killed me in cotton for the past year, I love the fact these four markets have been basically doing "nothing" for quite some time. All markets go through their own bullish and bearish cycles, and inevitably, what has been hot, becomes cold, and vice versa...And I think Corn, Wheat, Soybeans and Cotton, having essentially consolidated for the past year (or more), should all be ready for some sort of participation on the hot side.
The Money...And The Risk
Buying a slightly out-of-the-money call option in all four markets would cost approximately $5000 per "unit". If any one of these markets does make only a moderate bull move, and the other three markets just die, I think it is safe to say you would probably not lose money. Specifically, a $1.00 move in corn, wheat or soybeans, or a 13 cent move in cotton (all of which I would consider quite moderate), would make any of the options recommended below individually worth about $5000...And if any ONE of these commodities turns only half as bullish as some of the moves we have lately seen in other markets, I think you would come out far ahead on whatever you invested in all four markets. Beyond that, get two, three or all four going and you obviously could achieve some very high percentage gains...Just as obviously though, I have to point out that if none of them went anywhere, you could lose everything you have on the table.
I am not taking these positions in expectation of "blips" to the upside. If any of them are going up, with the way the world is today, I look for them to do so in a BIG way. How big?... I have no idea but "record prices" seem to be the norm of late and I see no reason why it could not be the same with these markets...not necessarily in the next 6-7 months, but down the road? Absolutely.
Could this be a clunker? As most of you have been around the markets, and me, for a long time, you certainly know it could be...But I think you also know the idea, the strategy, and the diversification ("shotgun") makes a lot of sense....There is a sign on the wall in front of me stating: ONE GOOD TRADE IS ALL IT TAKES...Though the last nine months made me feel pretty stupid, I know I'm not...and I firmly believe this is that next GOOD trade...or maybe even something a lot better than that.
Give me a call if your are interested in this or any other markets. Come on back in the pool boys. I'm due.
new toll free 866-578-1001
new local 770-425-7241
Ethanol demand is becoming a factor in this market...Also note China's corn stocks are projected at
20-25 year lows...All time high in Corn is $5.54 a bushel.
Already encountered some weather problems...Corn, Wheat & Beans all look like they are trying
to bust out to the upside...All time high in Wheat is $7.50 a bushel.
Again, just a big consolidation in what can be a very big mover...Biodiesel production becoming
a factor in this market. All time high in Soybeans is $12.90 a bushel.
The only one of the four "in the hole", which makes it attractive from a diversification standpoint.
Who knows? Maybe this is the one that turns into a rocket...All time high in Cotton is $1.17 a pound.