October 5, 2016
Back in January, with the agricultural analytic community more overwhelmingly bearish than I had seen in decades in Corn, Cotton, Soybeans and Wheat, I recommended buying 1 and 1’s(1 call & 1 put) in all four of these markets as a sort of composite bullish trade in row crops…And while I had no takers on the “all four” idea, I did get selected buyers in Cotton, Wheat and Soybeans (specifically Soybean Meal). The end result was that by mid-summer we had seen an 80 cent rally in Corn, 20 cents in Cotton, $3.00 in Soybeans and 60 cents in Wheat…but this was followed by every one of those markets then having sizeable to gigantic selloffs, with Wheat, my strongest recommendation of the four, having been the smallest performer on the upside and then the absolutely worst performer on the ensuing downswing…The bottom line is we had varying degrees of success in Cotton and Soybean Meal, virtually no one who even traded Corn, and initially, decent profits in Wheat, that quite frankly, were blown away as the 60 cent Wheat rally reversed into a straight down $1.20 sell off into new 8 year lows…I would also add that this reversal so completely fooled me that I eventually abandoned the 1 & 1…thinking the market HAD to turn up…and watched a number of call options expire worthless. This was pretty stupid. No other way to describe it.
So, that’s the past…Now to the future…
While I believe I could pretty much make the same “buy all four” recommendation I made nine months ago, for the time being, I am now returning to the table as a RABID buyer (again) in Wheat. This is not ego. This is not because I am too stupid to give up. I am buying Wheat again because, for one, it undoubtedly is regarded as THE most bearish agricultural commodity on the planet…which DOES affect the actions producers and users take regarding the future…which when combined with EVER INCREASING WORLD RECORD DEMAND…DOES result, at some point, in a bull market…Just as nine months ago NOBODY was looking for a $3.00 rally in Soybeans, or 20 cents in Cotton…or let’s not forget a $25 rally in Crude Oil…So too is it with EVERY commodity market bottom I have ever seen…And yes, this is old hat commentary…the whole,” It is always the most bearish at the bottom” thing…BUT IT IS TRUE. NOTHING IS EVER BULLISH WHEN IT’S TIME TO BE BUYING A COMMODITY ON ITS LOWS. NOTHING. NOTHING. NOTHING…which is why, for me, when I “recognize” these opportunities, it is so unbelievably hard to persuade anybody to participate.
SEE BELOW---THE FUNDS ARE STILL SHORT IN ASTOUNDING NUMBERS…EVEN MORE SO THAN SIX MONTHS AGO…AND GOING BACK 20 YEARS, WHEN THIS MASSIVE AMOUNT OF SPECULATIVE MONEY IS COMBINED WITH RECORD COMMERCIAL LONGS (MEANING RECORD CUSTOMER ORDERS ON THEIR BOOKS), EVENTUALLY YOU DO GET A BIG MOVE TO THE UPSIDE.
Usually, when a market has record spec shorts…the INEVITABLE rally is not accompanied by any specific news that starts the rally…It’s occurs simply because there is massive buying that HAS to be done (to exit their shorts)…sooner or later…And quite often the primary trigger is nothing more than that the market STOPS going down…or can’t go any lower…or has run out of producers willing to sell at below the cost of production…and from there, ANY (even the smallest) uptick in prices can set the whole thing off…ANY uptick in prices can begin the exodus of shorts who are now BUYERS…and before you know it, their buying induces more buying…and off the market goes on the upside...supposedly, according to the typical ag analyst, “for no reason at all.”
Here are two ways to do this at today’s prices…
Or just buy the call and define your risk…
A close look will reveal that today’s 10 cent up day, while not a monster move, DID cut through the majority of the previous month’s trading…so there is at least a bit of significance here…Even so, I did see what I would regard as a classic line in the ag media, often found at market bottoms, “not sure why wheat prices are up today”…The fact is, Wheat did just have a higher monthly close in September, and while there is nothing conclusive about this “reversal higher”, that is the first thing you do have at any bottom, i.e., some indication that the market has “stopped going down”.
Here is the long term look…
The fact that I have been wrong about this has nothing to do with the present. Part of this game is that you do your analysis, and if the analysis says, “Buy it”, you do have to have an attitude that does discard the past. You have to mentally walk up to the table (a trade) as though it is the first time you have entertained the idea.
I THINK WHEAT IS A SCREAMING, ROARING BUY.
I would also offer that the old adage, “the bigger they are, the harder they fall”, is often true in this business…That is, when you have a massive wad of money betting one way in these markets (funds in Wheat), there is no question it can lead to BIG moves.
Add this to your Eurodollar position.
Give me a call,
Thanks for reading…
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The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Wheat