July 1, 2020
Row Crops Off and Running?
Yesterday’s USDA report shocked the ag world with surprising reductions in acreage almost across the board for the major USA row crops…And produced sharply higher closes in Corn, Cotton and the Soybean Complex…Together with the fact that large speculative funds have been holding record short positions in Corn, and weather forecasts that are now increasing the odds of an upcoming period of hot, dry weather in the Midwest, today produced another strong day in all four markets.
Since yesterday’s report…
Ok…None of these are giant moves…but they are a SOLID start…and believe me, a TOTAL surprise to the hordes of bearish analysts out there…
And between the fact that virtually NO ONE was even remotely considering the long side of these markets…AND the prospect of potentially dangerous weather?
In my opinion what we are seeing definitely COULD be the beginning of truly dynamic moves in any, or all, of these four markets. Obviously there is no way to know if this IS the case until after the fact…but with my experience having been that there is very little that can be bigger and faster than a weather market in the row crops, what I DON’T do right now is sit back and think, “Let’s see what happens.” Especially in these days of extreme volatility…both in the markets themselves…AND in the weather.
No, I don’t know if we’re about to enter some degree of a drought, or simply a period of too hot, too dry weather at the wrong time for crops…but what I DO know is that when the market action starts suggesting (with strong gains) this possibility, what you should do, and I AM doing, is: Get on. Define your risk. And THEN “see what happens.”
The truth is, you don’t “trade” a weather market. You simply have to establish positions with the early indications that something might be happening…and then you have to JUST MAKE YOURSELF SIT TIGHT for the ensuing 4 to 6 weeks…
They don’t ring a bell and tell you a big move is starting…
Very importantly, however, you have to understand that weather driven bull markets are NEVER obvious…UNTIL they are almost over. Droughts do not become droughts in one day, or even in one week. It’s a cumulative thing that typically develops over a period of maybe a month or two…and it is ONLY after the markets have made a significant advance that the media gets around to headlining and DEFINING what is happening as a “Drought!!”, which in my experience, usually means the move is almost over…or has become to too big to even begin to think about entering if you are still on the sidelines.
To clarify what I mean about weather driven bull markets not being obvious, here are closer looks at what Corn, Wheat and Soybeans did during our last serious drought, in 2012, with a few observations to hopefully help you understand that you WON’T know how big and fast the move is until AFTER it has reached its apex.
YOU HAVE TO BE THERE BEFORE THEY START…AND STAY THERE.
The lesson here is that they don’t just go straight up every day…from the get go…And there are plenty of pauses to keep you thinking, “nothing is really happening.”
Try to take yourself back to 2012 and imagine what the talking heads might have been saying from start to finish in this $20,000 a contract rally…And DO understand that during all of those 4-5-6 day pauses, analysts were probably not screaming, “Buy it!” More than likely, their attitude was, “The fundamentals are still bearish. This rally is overdone. Sell it!”
Until, of course, the whole thing was over on the upside…
I could show you breakdowns of many more weather market moves but they all look something like you see here…They start, literally, from one day to the next, and they DON’T start with some big banner that says, “Drought (or Flood) is a certainty. Get on now!” And while they can go fairly straight up as the Wheat did, they also can have 4 or 5 days out of 20 in which 80% of the move takes place...So again, the point of this whole newsletter is: YOU HAVE TO BE THERE BEFORE IT HAPPENS…AND THEN YOU HAVE TO JUST SIT TIGHT WHEN IT HAPPENS…In my opinion, this is the biggest, fastest thing that ever happens in this business, and my accumulated understanding of the psychology of this madness has taught me that if you aren’t “on it” when the rocket BEGINS to lift off, you are NOT going to get on once you later MAYBE realize what is happening.
Here are the call options I would buy here…And as I have often pointed out, it is foolish to try to pick just one of these…If at all possible, I think you absolutely do all four.
I am using Sept options based on the December contract in Cotton.
$3652 buys all four markets…which means that if just ONE of them makes what I would call a SMALL move, you will probably come out ahead…And if 2, 3 or all 4 move? Just use the lowest targets on each of these charts and do the math yourself…Obviously, it is certainly possible that all four will just lay here through the summer, or go down, but I DON’T think that will happen. Quite the contrary…I think all of them are going to do something SIGNIFICANT on the upside, and the only questions I really have are, how big will each of the moves be?
And again…You are NOT going to get some Holy Grail Clue that this is about to happen (or already is happening). You’re either in this…or not. For my own money, I love the “look” of these markets…I love the fact that the funds are so overwhelmingly short…I love RECORD world demand…I love that we are already talking a bit of potential weather problems...and I love what I think the odds of a rally are…I’m on this. As always, I might be dead, dead wrong, which can mean losing every dollar you invest, but my own view is that this is a chance to make a truly big hit…I am buyer now…and I WILL be adding if/as any of these markets “get it going.”, as, again, THERE IS NOTHING LIKE A WEATHER MARKET IN THE GRAINS.
Hope you’ll give me a call and do something with this…preferably tomorrow. The markets are closed Friday so we now have a long weekend ahead…and the current forecast IS for hot and dry to begin next week…so there is no telling where we might be come Monday morning.
All option prices in this newsletter include all fees and commissions. All charts are from Aspen Graphics.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Corn, Cotton, Soybeans, Wheat