October 31, 2013
We are no longer Short Corn
As I have often written, “Popular ideas tend to lose money”, and I am therefore always uncomfortable when I find myself thinking along the same lines as everybody else in this business…which now seems to be the case in Corn.
While I have been steadfastly recommending Short Corn, Wheat and Soybeans (essentially as one multifaceted trade) for quite some time, in the past few weeks I have had the ill feeling there are just too many people out there suddenly calling for the same $3.50 target I have also had in mind…I AM THEREFORE OUT OF ALL SHORT POSITIONS IN CORN AND NO LONGER WOULD RECOMMEND FURTHER SALES IN THIS MARKET (temporarily, I still think the big picture is decidedly lower).
The truth is, from my one man vantage point, alone in front of this screen, listening and looking at all the markets, there ARE times when my trading senses DO pick up on precisely what the “groupthink” (usually wrong) has become in specific commodities, and I can honestly say it does sometimes pay (certainly not always-sometimes it obviously leads to losers) when I am able to put those generally herd mentality opinions together with a particular set up in specific commodity trades…which is where I currently am in Corn, Wheat and Soybeans.
In Corn…sentiment has turned quite bearish. As noted, suddenly I am hearing lots of people calling for $4.00 (from the current $4.30) like it’s a sure thing, with $3.50 the eventual equally high probability target. With Cash Corn having dropped over $3.00 a bushel since Mid-June, as indicated above, I just don’t think there is any immediate downside potential in this market.
In Wheat, my impression is quite different. The overwhelming majority of analysts seem to keep talking “technical support”, “crop problems” and “potential bottom”, even though this market is still in a protracted downtrend. Wheat is essentially on its lows at what is still a very high $6.70 a bushel, but I have yet to see the first guy say, “Headed for $6.00!”, or $6.50, or anything even approaching a bearish attitude. All I hear is bull talk…At most market bottoms, there will be tons of people proclaiming, “Headed lower! Sell it now before it’s too late!”. This is NOT the case now. The analytic herd is bullish. I remain extremely bearish.
In Soybeans, very much like Wheat, all I seem to hear is nothing but bullish talk about weather damage, strong demand, etc…and not a word about the fact that $12.85 a bushel is still a VERY rich price for Soybeans…All the analysts I observe keep talking about “support levels”, with not a word about downside targets…Meanwhile, as I’ve written before, I think this market has been building a MAJOR, MAJOR LONG TERM TOP over the past few years, and I think all the reports I see suggesting, “Farmers won’t sell their crop at these prices”, are only correct in the fact they may be reluctant (foolishly I think) to sell now, but they WILL be selling later, just at sharply lower (NOT higher) prices...My guess is, 2-3 months from now, with Beans $2-$3 lower, I’ll be talking to guys and hearing, “I sure wish I’d sold $12.85 beans when I had the chance”.
Summarizing: I am out of all Short Corn positions. I continue to strongly recommend being Short Soybeans and Short Wheat.
I’m sure Corn might drift a little lower from here, but I can just as easily imagine it trading between maybe $4.20 and $4.60 for the next 3-4 months…simply because I’ve seen it “do nothing” for months on end MANY times in the past 33 years. The truth is, and I will address it further below in this newsletter, I THINK THAT BUYING CORN AND SELLING WHEAT AGAINST IT (A SPREAD) IS A TREMENDOUS TRADE RIGHT NOW.
But I absolutely don’t think sideways is what we’re about to see in Soybeans and Wheat…especially when Soybeans are almost TRIPLE (!!!) the price of Corn?
Being Short Soybeans has been a miserable experience for the past year (or more) as they have essentially traded sideways…but sometimes you just have to stick with an idea to see it pay in this business, which is why I continue to maintain shorts in this market. I DO see the past few years as a MAJOR topping formation in Soybeans and still look for prices to, much sooner rather than later, hit downside levels that the average farmer/trader would currently think impossible. But that’s the way this stuff works (in my opinion). Commodities are inherently volatile. Year after year they repeatedly swing to extremes that surprise the masses…and so will it be, I believe, in Soybeans. MY FIRST TARGET IS TO SEE THEM UNDER $10.00 AND I THINK WE WILL SEE THIS HAPPEN, IN FAIRLY RAPID FASHION, SOMETIME WITHIN THE NEXT 2-3 MONTHS.
Look at all those collapses…Even when we were trading at a then high$8.00-$9.00, Two and three dollars sell off were practically ROUTINE…And here we are at almost $13.00?
Here’s one option I like…I continue to feel like Soybeans are at the cliff’s edge and would not be surprised to see an acceleration lower ANY day now…
Here’s the long term picture in Wheat…Don’t kid yourself …If Wheat was $4.00 just 3 years ago, it CAN easily be back there within another 9-12 months. I’m not sitting here saying, “It’s headed for 4 bucks!”, but I do know this could be an eventual target…Too many times, producers get lulled into thinking prices “just can’t be going that low again”, when history has often shown that very high prices ARE followed by very LOW prices.
Here’s one way to get on…
I am Buying Corn and Selling Wheat against it.
This is a margined futures spread and I am not concerned about which way the markets actually go…All I am trading is my belief that the spread (price difference) between these two related markets will come back in to more normal levels. If this idea is confusing to you (it easily can be) give me a call and I am sure I can clearly explain how it works…
And here is the Wheat vs Corn Spread going back 50 years…
Here’s the trade…Basically, I think we’ll see Corn do nothing…holding relatively steady…while Wheat falls sharply…thereby narrowing the difference in price between these two markets.
Enough for today. I’ll try to cover the other markets in which we’re currently involved tomorrow.
And with the understanding I may be dead wrong…which will probably mean losing money…I AM BEING QUITE AGGRESSIVE WITH BOTH SHORT WHEAT AND SOYBEANS HERE AS I AM ABSOLUTELY CONVINCED THE PRICE COLLAPSE I HAVE BEEN EXPECTING IS NOW IMMINENT. HARVEST IN THE NORTHERN HEMISPHERE IS NOW UNDERWAY. ALL THE WEATHER TALK IS NOW JUST TALK. SOUTH AMERICA IS GEARING UP FOR THEIR BIGGEST CROPS EVER…AND HOWEVER TIGHT THE LONG TERM NUMBERS ARE SUPPOSED TO BE, FOR THE NEXT 3-4 MONTHS THERE WILL BE NO SHORTAGE IN EITHER OF THESE COMMODITIES…MEANWHILE, FARMERS (POTENTIAL/FUTURE SELLING) ARE STILL SITTING ON MASSIVE PERCENTAGES OF UNSOLD CROPS, WHILE AT THE SAME TIME, I JUST CAN’T IMAGINE THAT ANY END USERS ARE CURRENTLY WORRIED, AT ALL, ABOUT BEING ABLE TO BUY EITHER WHEAT OR SOYBEANS…IN OTHER WORDS, I LOOK FOR LOWER (UNEXPECTED) PRICES TO SPUR ANXIOUS FARMER SELLING…WHICH WILL BE MET BY “UNANXIOUS” END USER BUYING…WHICH I BELIEVE IS EXACTLY THE RECIPE FOR SHARP MULTI- DOLLAR DROPS IN BOTH OF THESE MARKETS.
I AM SHORT AND ESSENTIALLY WANTING TO BE SHORT MORE WITH EVERY DOWN DAY WE SEE…
If anything here interests you, pick up the phone and call…I am always available and always willing to talk…
Come on guys…I think this is it…Might be wrong but I think this really is it…Write the check. See what happens.
ONE GOOD TRADE IS ALL IT TAKES (one of my wall reminders)
The author of this piece currently trades for his own account and has financial interests in the following derivative products mentioned within: Soybeans, Wheat, Corn.