July 10, 2019
In my opinion, United States agricultural products
are probably the most undervalued assets on the planet.
I believe that the past year, due to prices having already been extremely low for years…quite often below the costs of production…which was then followed by all of the horrible impacts of Trump’s trade war…has resulted in some of the most negative/bearish sentiment towards row crops that I have seen since the mid 1980’s, when we had $1.50 Corn, $2.50 Wheat and $5.00 Soybeans…when farmer bankruptcies hit levels not seen since the Depression…and the idea of rising prices, at that time, seemed almost impossible. Remember “Farm Aid?”, when outright donations were needed to help our food producers just stay in business?
No. I don’t think it’s that bad right now…but after roughly 5 years of consistently low prices, farmers are definitely struggling…and from my little listening post here in Georgia, my perception is that this lengthy depressive period has resulted in an atmosphere in which no one in the ag community any longer believes prices can go anywhere significant on the upside…ESPECIALLY as regards the Soybean Complex. For sure, the recent rally in Corn has resulted in more bullish expectations (that were NOT there several months ago), but by my reckoning, those expectations (of maybe 50-75 cents higher?) are quite mild compared to Corn market rallies we have seen in the past when prices were much, much lower…I’d also add that although it does not mean were about to see same thing now, my impression is that farmers and traders seem to have almost forgotten that $3-$4 moves in Soybeans have at times been routine in the past.
I continue to see Corn, Wheat and Soybeans/Soybean Meal as major buys…
but continue to focus on Soybean Meal as my #1 trade.
To be quite honest, the fact that virtually ALL of the research and opinion that I’ve lately seen regarding Corn seems to argue for it moving higher as being something of a “lock”, I am currently somewhat wary about owning it. But when it comes to the Soybean Complex…which has specifically borne the brunt of the bad news vis a vis the trade war with China…? My take is that sentiment towards Soybeans is exactly the opposite of Corn. Absolutely bearish in other words….I am sure it is out there, but I have yet to see any research, or hear any opinions, that are anything but bearish…Maybe we had a smattering of Soybean bullishness a month ago concurrent with the wet weather (AFTER the $1.00 run up in prices) but from what I can see, the masses have returned to thinking that “Soybeans basically have zero upside potential.” At any rate, that is precisely what I have heard in every conversation I have had with farmers for the past month or so…right down to this morning when I asked an old and wise operator of multiple grain elevators, who obviously talks to a lot of farmers, “ Is ANYBODY you know bullish Soy?”, and got the reply, “Nobody, nowhere!” The word is too many Soybeans. The China thing still is out there. And on top of that, all of the hogs being slaughtered in China due to African Swine Fever will also mean less demand for Soybeans and Soybean Meal…all of which, as I believe, and keep repeating, is already “in the market.”
Assuredly, just because my perception that sentiment is so bearish does NOT mean a bull market is underway, but one more time, I do believe that all of the negative trade war news has long since been accounted for in the markets, and that together with the fact we have record world demand…and crops that went in the ground either late or not at all…and that bad/abnormal weather (or simply a “scare”) before we reach harvest is still a possibility, I do believe that the lows made back in May were THE lows in Soybeans for years to come.
I would also add that from a macro sense, I think all of the agricultural markets shown below will spend at least the next few years moving significantly higher, and therefore more or less see them all as markets to be only approached from the long side.
Here are some charts…
And here is where my very first choice definitely is…In Soybeans and/or Soybean Meal..
Here is my main focus…
If you want to talk about any of these markets, please give me a call…I would also note that there is another USDA report tomorrow at 11:00 EDT which may or may not move the markets, and subsequently option prices, a great deal away from current levels.
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: Soybean Meal