September 20, 2011
One more time…
Is this one “the charm”?
Short Soybean Oil. The “best 2 & 1 ever” (again).
Yes, I am back on this. I am still extremely bearish. My reasons are many but unimportant. I will say they stem from (1) A long term historical price perspective, (2) My sense that this whole bullish forever commodity scenario has played for too long, and (3) My firm conviction that 90% of all price movement is based on fear, greed and mob psychology…As I’ve said over and over, all the markets are more a big game than anything else…and with several excellent, very recent examples (charts follow) having reinforced my feeling Corn and the Soybean complex are long overdue to take a 35-40% hit (or worse), I’ll start with a look back at the following two markets.
I have referenced them both before but will do so again…
Back in the spring, Cotton was an absolute rocket. The world was supposedly running out of it. There was “none left in the United States”. On top of that, Texas, which produces about 40% of the US crop was (is) experiencing the worst crop eliminating drought in their history…So what happened? I think the following chart says it all…
Or take a look at this…
So now I offer the following current charts…and will simply say: We have four major row crops in this country…Cotton, Wheat, Corn and Soybeans. In the midst of supposedly invincible bullish fundamentals, two of them have cratered in recent months…And I see no reason whatsoever not to assume the same fate is fairly immediately ahead for the other two…especially now as we head towards what should turn out to be a monster harvest.
Here is what the trade looks like using the January 2012 Soybean Oil contract…
As many of you have often heard from me, my opinion is not the important thing…As my wall reminder says:
YOU WILL BE WRONG. YOU WILL BE RIGHT.
What is important, from my old hack perspective, is the MATH…When I look at what an option position costs, and then combine it with what I think is a minimal expectation for a market to move, if I’m wrong, where will I be dollarwise? Conversely, if I am moderately to definitively right (not monster right), will it mean a big score? Everybody has their own approach to the markets…Mine is, if I take a position, I want a chance to hit it big…like, at a minimum, 3 to 5 times what I have on the table…And this IS exactly how I see the Soybean Oil market…If it goes nowhere, and many of you have experienced it doing just that, it means losing money…But with 31 years in this crazy business, experience has shown me on countless (truly) occasions, what happened the last time around does NOT mean the next time will be the same…I LOVE THIS TRADE.
Beyond that…here is some interesting math if you want to take a more “conservative” position. The potential is far less, but the odds of a winner are, in my opinion, certainly stronger.
Here is the Soybean contract I am using…Again, go to the long term chart and decide for yourself whether there is decent potential for a $2 to $4 selloff
And here’s the Corn…Again, I’d encourage you to scroll up and take another look at the 40 year chart on this one as well…
As we now head into harvest for both Corn and Beans, there is NO size straight down sell-off that would surprise me...My perception is, with all the unceasing ultra-bullish talk everywhere, there are hoards of farmers who have been lulled into thinking both of these markets could still zoom higher...and consequently have NOT really sold much of these very large crops which are still in the field…Concurrent with all the stats indicating supplies could be “tight” into next summer, I would also suppose many of those same farmers are expecting to hold inventory into next year, hoping to sell at higher prices…The point is, I think there is a MOUNTAIN of farmer selling waiting in the wings, and that selling, combined with the accompanying speculator liquidation, has the potential to EASILY take Beans into single digits and Corn under $4.00. Furthermore, because these ARE the highly leveraged and highly volatile futures markets, seeing either of those numbers before we get to 2012 would only surprise me a little.
If you are a farmer…
As an added note, if you are a farmer, I would STRONGLY recommend you begin NOW to lock in prices for some of your 2012 production. You’ve seen it too many times before, where roaring bull markets are followed by 2-3-4 years of relentless bear markets…And though locking in $6.20 December 2012 Corn, or $13.25 November 2012 Soybeans, might be hard to do in this current ever bullish environment, from a business standpoint, it just makes sense…We HAVE been in an incredible period of rising prices, and yes, they MAY stay strong, but again, they stand just as good a chance to do exactly what we have already seen in Cotton and Wheat this year…Furthermore, if you are still sitting on a large unsold percentage of 2011 Corn and Soybeans, I would suggest you take a hard, immediate look at getting some sort of protection (with options maybe). DON’T let yourself fall into the trap of thinking, “I’m going to get a bunch of these crops sold the NEXT time we rally 50 or 75 cents”, as, right here in front of harvest, there are 1000’s of people maybe feeling exactly the same way…Absolutely give me a call if you want to talk about any of this. I’m no market guru, but all of my research is my own, I work hard, talk straight, and answer my own phone. So don’t hesitate to call…whatever it is you want to know. There are no dumb questions in this business.
Okay…that’s enough for now…except to say I do believe it doesn’t get any better than this options position in Soybean Oil at 56 cents…and that just because it didn’t work the last time we tried it does NOT mean the result will be the same on this go round…If you have been on this before, I urge you to put something on it again. I assure you, it CAN be at 35 or 40 cents three or four months from now, and I sure as hell intend to be on it if it does…which is why I, personally, am still on this position and have my finger on the trigger ready to add. Maybe I am dead, dead wrong but, more than ever, I still think this is a big one.
Give me a call about any of this…I love to hear what you guys think and am always ready to talk.