October 15, 2012
$4.00 Corn and $10.00 Soybeans?
BE SHORT both of these markets.
Ok. I know. You read it everywhere…There is supposedly this unbelievable shortage of Corn and Soybeans and there is no way we will make through the next year without seeing prices go substantially higher…or, at a minimum, that seems to what the overwhelming majority of analysts will tell you…
I TOTALLY DISAGREE…I believe both of these markets have topped out and will stair-step lower, sometimes in massive chunks, all the way down to sometime in mid 2013. I don’t know if we will get to $4.00 in Corn or $10.00 in Soybeans, but I do see those levels as VERY definite possibilities…and while this is happening, you will probably being hearing a script I have seen on countless occasions the past 32 years, that being, “Supplies are tight. Prices have to go higher to ration demand. We could run out of corn/beans before the next crop comes in. Exports are ahead of last year. If we get bad weather…There is no place to go but up”, etc. etc.
BEAR MARKETS IN THE GRAINS are seemingly always accompanied by endless bullish fundamental analysis and I think the next 9 months will be no different. The markets will be trending steadily lower. Analysts and farmers will keep looking for bottom all the way down.
WE HAD A DROUGHT. The futures markets have most likely accounted for the losses in production---with a $3+ rally in Corn and $5+ rally in Soybeans---It may be stating the obvious, but those are BIG numbers…
THE DROUGHT IS HISTORY…It can certainly be different this time, but weather generated bull markets in agricultural commodities seem to go straight up…then go relatively straight back down…ALL the way down.
Ag people everywhere are still looking for $10 Corn and $20 Beans, with, most recently, all sorts of talk about, “What if they get bad weather in Brazil or Argentina?”. All I say to that is, I once spent 6 months driving from the bottom of South America (Tierra del Fuego) all the way up to the Amazon River, passing through Argentina, Uruguay, Paraguay and Brazil (2 times), and my own impression has therefore long since been: The growing areas encompassed by South America are so massive that bad weather in one section of the continent could easily be offset by excellent weather somewhere else. If it’s dry in one area, it’s probably wonderfully wet everywhere else. After all, you must not forget, half the continent is taken up by maybe the wettest place on earth, the Amazon rainforest, and it is basically shoulder to shoulder with many of those areas where major crops are produced.
To further clarify…You can drive across our Midwestern Corn and Soybean belt in a day. To make the same sort of trip in South America would EASILY take you 10 times as long. My opinion? Don’t bet on bad weather in South America. Don’t even think about it.
WE HAVE JUST HAD TWO BACK-TO-BACK EXTREMELY BULLISH USDA REPORTS (according to the analytic community), especially for Corn, and what has been the result? Both reports produced one day limit up moves, as everybody screamed, right on cue, “Oh my God! There’s hardly enough to go around!”, but both markets then promptly went straight back down…This is NOT the way bull markets react. Not in my old hack opinion anyway.
I’ll say it again. ALL THE DROUGHT DAMAGE HAS BEEN ACCOUNTED FOR…EVERYBODY THAT NEEDED TO BUY, DID BUY. Think about all the hype a few months back. The drought was all over the news, and believe me, when everybody is that jacked up, people who know they will need the product DO get influenced into contracting (buying) far out into the future…In other words, a heck of a lot of buying already has been done.
MEANWHILE, YOU HAVE A WHOLE NATION OF FARMERS WHO ARE BULLED UP, SITTING ON MOUNTAINS OF PRODUCT, AND THINKING THEY WILL “WAIT FOR HIGHER PRICES”. The harvests are coming in, and while farmers may have done some selling, I would guess there are huge percentages of them who are still hoping ( a BAD word in commodities) for another rally before they sell. Everything they hear (like the most recent USDA reports) argues for much higher prices, so they are quite naturally reluctant to sell now…BUT…at some point they do HAVE to sell and what often happens is they find themselves, almost like clockwork, selling in a panic after the market has tanked.
FINALLY, GOING FORWARD, YOU HAD BETTER BELIEVE TODAY’S PRICES IN CORN AND SOYBEANS WILL RESULT IN MUCH MORE ACREAGE, WORLDWIDE, FOR BOTH OF THESE CROPS…We won’t be running out of either…and if history is any guide at all, the next big news here will be “How did prices ever get this low?”. I’ve seen it. You’ve seen it. Over and over. It’s just the way this stuff works.
BE SHORT CORN. BE SHORT THE SOYBEAN COMPLEX. I MAY BE DEAD, DEAD WRONG BUT I THINK THESE MOVES ARE ALREADY UNDERWAY AND POTENTIALLY READY (FOLLOWING THE “BULLISH” USDA REPORTS) TO ACCELERATE SHARPLY TO THE DOWNSIDE.
Here is the Corn picture and one option I like….
Here is the Soybean complex…and a few options I like…
And I AM BULLISH COTTON
As stated in my October 2nd newsletter, I recently started buying Cotton with expectations of, minimally, 25 to 35 cents on the upside. Since then, the same USDA report that last week was supposedly SO bullish for Corn, also was classified as quite “Bearish” for Cotton, which only served to reinforce the seemingly unanimous negative opinion I see everywhere for this crop.
My opinion has not changed. I AM STILL VERY BULLISH COTTON. To save time, here are excerpts from that newsletter outlining my reasons for being a buyer here.
October 2, 2012 (EXCERPT)
Early last month, I had a comment from one of my agricultural banker buddies, “Prices are good for everything”. I asked what he meant. His answer was, “With today’s prices, you can make good money planting everything…corn, wheat, soybeans…The only crop that isn’t profitable is cotton”.
All of the commodity markets go up and down. They become overvalued and undervalued…and relative to just about any major agricultural crop you want to name, in my opinion, COTTON IS SEVERELY UNDERVALUED.
I’ll get into a few of my possibly irrelevant reasons for being bullish Cotton in a moment, but first just take a look at where Cotton is pricewise compared to a few other ag markets….
Ok…So from the charts, it is obvious that Soybeans and Corn are sky high, while Cotton is not…
These three markets are planted at generally the same time, Spring, in both the northern and southern hemispheres, and while there are various factors that go into a farmer’s decisions as to what they will plant, profitability is certainly at the top of the list…
I don’t think I need to rattle on forever to point out that current record high prices in Corn, Soybeans and Wheat will most likely influence farmers, in the coming year, to choose planting those crops over Cotton, in virtually any circumstance where they do have a choice as to what they put in the ground…After all, farmers ARE looking for the best return on investment, and if they have a choice, why would they plant a crop that on paper will only lose them money when there are other crops that present the opportunity to make a substantial profit?
In other words, I believe a LOT of formerly Cotton acreage will be switched to other crops in 2013…on a worldwide basis.
Part of this game is in understanding what everybody else thinks, and here is what seems to be the universally held opinion among cotton analysts (with whom I totally disagree): “There is too much Cotton, especially in China. There is so much cotton it doesn’t matter if we make a crop or not…The world economy is weak and may be headed into a global recession…Cotton currently, at 70 cents , is probably headed for 60 cents.”
That’s it. Plain and simple. I’ve been looking at this market as a potential bottom for months, and I can tell you that “no hope” sort of rhetoric is everywhere…
Cotton stocks are too big? Virtually every commodity bottom I’ve ever seen has been accompanied by very large stocks (that’s one of the reasons why prices WENT down).
The world economy is on shaky legs? As I’ve been writing forever, I believe the world is on a gigantic economic upswing, that our stock market is on the verge of LIFTING OFF on the upside, and that anybody who is placing bets based on the idea the US and World economies are going south…is going to end up a big loser.
I may be dead wrong but I simply cannot see Cotton still sitting anywhere even close to current prices come late next summer…and this opinion does not even take into account what could happen if we get into bad weather…So my bottom line is: Buy it here. Define your risk. Let it happen.
I still like the March 75 call here…
A final thought, putting all this together…I really think there are 3 great ideas here. In the end, this game is about making educated (hopefully) guesses and taking calculated risks…and, as I am forever pointing out, it’s also very much about the math. Your opinion is only part of the equation…
So here’s how I see the “math” here….I wouldn’t be recommending any of these ideas unless I thought they all had fairly stout profit potential. This certainly does not mean that any of the three will definitely “hit it big” (in fact I really could be dead wrong about all of them, meaning you lose everything you have on the table), but when I write “I can EASILY see” a market getting to a certain level, I mean it. I don’t just sit here and throw out big numbers to entice anyone into the markets…I DO expect to see $4-$ Corn, $10-$11 Soybeans, $300-$350 Meal and 95 cent Cotton. Again, this doesn’t mean I will be right…but that IS why I am in those trades.
I actually see Short Corn, Short Soybean Meal, and Long Cotton as one trade…as a sort of “portfolio” in which, to own all three ideas using the options noted here, you would be spending $4695 per “unit” (one Corn put, one Meal put and one Cotton call). Aside from the fact I LOVE these trades and do think they realistically have the dollar potential noted on the charts above, I also like the fact I could actually be dead wrong on two and right on one…and still come out ahead.
There are lots of possibilities as to how this could work out…from dead wrong on all three to dead right on all three. If what I’ve written here makes any sense at all , I encourage you to go back to the charts and do the math for yourself. Do some “if, then” calculating…and give me a call if you want to know more.
And don’t expect to get on the internet and find a whole bunch of people who agree with me…You won’t.
The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Short Corn. Short Soybean Meal. Long Cotton.