October 12, 2013
This is a brief update, mostly just charts, of markets in which we currently hold positions…
SHORT CORN, WHEAT & SOYBEANS
I continue to view all three of these markets as being in the process of beginning (or continuing) price collapses that are going to profoundly shock the agricultural community.
Too many times to count have I heard it said: “Farmers are in great shape. They have plenty of cash. They will NOT sell at current or lower prices…because they don’t have to. They can wait for higher prices. Therefore prices have to come up to induce them to sell.”
I think this is absolute hogwash. In my opinion, your average farmer or commodity trader, whether it be in futures or in handling the actual commodity itself, is more inclined to make decisions based on fear and greed than anything else, with FEAR being the primary factor that induces people to act. And I firmly believe we will see various periods during the next 3-6 months when farmers WILL be selling their crops, deep in the hole, and basically in a panic, as steadily (and sometimes sharply) lower prices will having them thinking, “No bottom in sight! Sell now…while I still can!”. At the moment, however, they are still sitting on quite large percentages of their crops, waiting (hoping) for the types of prices they have seen in recent years…which I maintain they WON’T see again for YEARS to come…and all the product they haven’t yet sold, WILL be sold, and furthermore, all of this deferred selling will eventually (or immediately, really) result in MASSIVE downward pressure on prices in the months to come. Harvest is here guys. This is not a time of “shortages”.
So I am short…all three markets…
To be honest, while my basic recommendation is to own puts in all three markets, I am currently positioning more aggressively in Soybeans as I see them as being grossly overvalued when compared to Corn and Wheat. Essentially, I still think Corn and Wheat have a long way to go on the downside, but they both have already come back down to the upper borders of their previous 20 year ranges…while Soybeans are still relatively in the stratosphere and therefore have some “catching up to do” on the short side.
If I have not expressed this point clearly, the following chart is the best way of demonstrating what I mean…
Corn and Wheat HAVE come down some…Soybeans have NOT…
Believe me, there is nothing that makes Soybeans more special than Wheat and Corn. These markets tend to swing together (though obviously not tit for tat), and to put it mildly, with Corn in the low 4’s and Soybeans in the high 12’s, something has got to give. I think it will be the Soybeans…and I think it will be in a big way.
I DO SEE SOYBEANS, MINIMALLY, UNDER $10.00 WITHIN THE NEXT 3-4 MONTH AND I THEREFORE CONTINUE TO RECOMMEND BUYING PUTS.
So here are the daily charts on all three markets…with options I like at current levels…
In Corn and Wheat, you will note both markets have been declining in an “orderly” fashion for quite some time…In my experience, when markets are going down, at some point, “orderly” OFTEN turns into “panic” (as producers finally get scared into selling…en masse) and these markets can then move as much in 2-3 weeks as they have in the past 3-5 months. Again, as you never know which market might be the leader from one week (or month) to the next, I want to own puts in all three markets…
OPTION COSTS QUOTED IN THIS NEWSLETTER INCLUDE ALL FEES AND COMMISSIONS.
Wheat is the market is which it seems every analyst I can find is calling for a bottom. I do NOT consider this a positive for Wheat. Having all these supposed “experts” citing, in unison, a host of the very same reasons to look for higher Wheat prices might be comforting if you are a farmer, but I have RARELY (if ever) seen a bottom made when all those guys were looking for it. It just AIN’T how this stuff works.
And Soybeans are, I believe, THE BIG ONE.
As I have written before, I see the almost 2 year sideways range (chart following) as nothing more than the formation of a MAJOR COMMODITY TOP. Three or four months from now, I think traders (and farmers) will be wondering why in the hell they didn't see the collapse coming...Instead, right now, with analysts galore talking about "weather damage" and "strong exports", just about everybody I read seems to believe prices are "well supported" and "have to go higher”.
SOYBEANS ARE ABOUT $12.50 AS I WRITE. I THINK WE WILL EASILY SEE THEM UNDER $10.00 BEFORE MARCH GOES OFF THE BOARD…AND IN TRUTH, UNDER $9.00 WOULD NOT SURPRISE ME AT ALL.
MAYBE I AM WRONG BUT I SEE SOYBEAN PUT OPTIONS HAVING ABOUT AS MUCH LEVERAGE AS YOU EVER GET IN THIS BUSINESS. I AM SHORT. I AM STAYING SHORT. I DO THINK THERE IS A MONSTER SELL OFF COMING IN THIS MARKET…AND I THINK IT IS GETTING STARTED NOW.
Here’s another possibility…
OK…My bearishness is obviously the strongest on Soybeans, then Wheat…and then Corn. But I DO think the smart thing is to own puts in all three…I ask myself, “Five months from now, what are the odds Corn is STILL going to be at $4.50, Wheat at $7.00…and Soybeans at $12.50?”.
OUR HARVEST IS NOW FULLY IN GEAR…AND SOUTH AMERICA IS BEGINNING TO PLANT THEIR BIGGEST CORN AND SOYBEANS CROPS EVER…WHICH THEY BEGIN HARVESTING IN FEBRUARY…THEREFORE, FOR AT LEAST THE NEXT 4-5 MONTHS, I THINK THE ODDS OF ANY BUYERS HAVING ANY WORRIES OF “TIGHT SUPPLIES” WILL BE EXTREMELY LOW…AND WITH POTENTIALLY MASSIVE HARVESTS COMING FROM BOTH HEMISPHERES DURING THE NEXT 5 MONTHS, I THINK THE ODDS OF SHARPLY LOWER PRICES ARE QUITE HIGH. AGAIN, THIS IS MY OPINION, ABSOLUTELY SUBJECT TO ERROR AND SUBSEQUENTLY LOSING MONEY…BUT THIS IS WHERE I PERSONALLY SEE THE POTENTIAL FOR A BIG HIT IN THE MARKETS, AND AM THEREFORE AGGRESSIVELY BUYING SOYBEAN PUTS IN AN ATTEMPT TO DO SO.
Still buying calls in Sugar
We are still also long Sugar…I keep seeing a lot of press about multi-year supplies being bearish for prices…which is EXACTLY what I want to be reading. As pointed out in my last newsletter, I simply think this market is WAY overdue some sort of bull market rally…which MAYBE is beginning to happen.
Still Buying Treasury Bonds
And we continue to buy Calls in Treasury Bonds…Even though it is everywhere in the news, I really think all the debt ceiling and government shut down malarkey is meaningless to the interest rate markets (and the markets in general). Two months from now, all the headlines and supposedly crucial negotiating will totally forgotten and almost regarded as an non-event in the big economic picture.
For me, the bottom line is: INTEREST RATES ARE STAYING LOW because they there is NO REASON for them to be higher. The supposed inflation boogey man has been dead for several decades. The economy is in no danger of overheating…or beginning to do so…and even if the Fed does end their latest QE program, EVERY fixed income buyer on Earth still believes US Treasuries are the safest piece of paper there is…and there is not ever, for one second, any shortage of buyers for every Dollar of US paper our government wants to issue.
I AM STILL BUYING TREASURY BOND CALLS. I AM STILL LOOKING FOR A 15-20 POINT RALLY BETWEEN NOW AND NEXT SPRING (OR EVEN BEFORE THE END OF 2013).
Give me a call if anything interests you here. There are lots of ways to participate in any of the ideas outlined here.
The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Corn, Wheat, Soybeans, Sugar, Treasury Bonds.