May 30, 2006
As I wrote on May 9th, over the past few years, billions of dollars in hedge fund money has been attracted to the commodity markets, resulting in some of the biggest bull moves we have seen in futures in many, many years. As you are certainly aware, the preponderance of those funds are on the buy side of the market and I believe their next logical targets are the major agricultural crops produced here in the USA. With the energy and metals markets showing either signs of tops and/or consolidations, I think it makes sense to expect some fund monies to see allocations away from the wild swings in those markets and into markets that perhaps are at the beginning of bull trends. The funds are primarily trend followers and when you are having movement such as Gold reversing $90 in 9 days, this can easily be enough to put many trending systems on the sidelines...and looking for other places to put the money. Throw into the mix some rather bullish fundamentals (such as corn and wheat world ending stocks expected to be the lowest in decades) and the USA's major export crops are an excellent place to expect that money to end up.
I have no idea how high any of them could go, or which of them might go the biggest. I think you just own them all and see what happens. If just one of them "goes", it could easily offset all of the other three absolutely going the wrong way. Get a couple of them going and obviously there is potential for some very attractive profits...Record highs seem to be the norm in anything that gets going these days and I see no reason not to consider that a possibility in Corn, Wheat, Cotton or the Soybean Complex...All of these positions can be taken with futures or options...And, with three of the four markets shown here having recently made new highs following very long consolidations, I believe you do this NOW...And, of course, I am obliged to tell you I might be wrong about all of this...in which case you would most likely lose money.
I've been pushing the hardest here lately...The growth of the ethanol industry is certainly a factor but I think of MUCH more importance is the simple fact China is beginning to import corn from the United States for the first time in five years. With World Ending Stocks in Corn projected to hit better than 40 year lows this marketing season (and those numbers assume favorable weather), the price impact of seeing a monster such as China go from being a net exporter to net importer could be enormous...
The first chart here is astounding when you look at how China's ending stocks were growing for decades...and then how precipitously they have been declining for the past seven years.If there was a one year dip in ending stocks, it might be attributable to some special event...but by all appearances, this tighter and tighter stocks situation looks very much like a major trend that I would not expect to just magically reverse and start climbing...which suggests one should not expect Chinese Corn imports to just be a temporary occurrence...and this would be a BIG deal.
chart: Hightower Report
The World Wheat Stocks situation is quite similar Corn with the Stocks to Use Ratio projected to be the lowest in 25 years...Ending stocks are what you have left over from one year's crop before the next crop comes in...Ending stocks should never fall to zero...Can you imagine, for example, if world wheat stocks hit zero...and there were still several months before the next crops could be harvested? The low Stocks to Use ratio is a measure of how tight stocks actually are.
Soybean oil has the same look as Corn and Wheat...Aside from being found in maybe 95% of the what is on the shelf in supermarkets, soybean oil is also the primary source for the growing Biofuels industry...There is no world shortage of Soybeans but the growth in Biofuels is certainlyly changing the overall supply-demand picture for Soybean Oil....And this market, like Corn and Wheat, has recently made new highs for some reason...
Still sitting there in the middle of the range it has been in for almost three full years...World demand is still running at a record pace...Weather (particularly in Texas which produces roughly 1/3 of the USA's production) is becoming more and more precarious with the Southwest remaining in what is approaching severe drought status...One old bird who has farmed Cotton in East Arkansas for 50 years noted that Cotton plants in his neck of the country (along the Mississippi) should be knee high by now but are only about the size of toadstools...This is a market that has a history of suddenly just cranking up and going...and every time I see it show any sign of strength I "know" this might finally be it...I think there is a ton of leverage in December call options....
China is gobbling up cotton as well...I see NO reason for this to change....
Give me a call if you want to know more...