Looking at the "Bigger Picture" in the Grains
Nov 21, 2011
As far as the Ag markets are concerned...I know I am on the right track when I am getting e-mails from the "wildly bullish," who are calling me a "sell-out," and the "wildly bearish" who are calling me a "candy @$$" for not just telling it like it is.
We have all heard the old adage time and time again in the investment world that "pigs get fat, and hogs get slaughtered." Simply meaning, if your a pig you want to eat, but you don't want to eat so much that you end up in the hog-slaughter. It is of my opinion, the same holds true in the investment world.
Being a "bear" in this environment is OK, just as long as you keep the longer-term perspective that the world is rapidly changing, and "demand" is growing by leaps and bounds. As the world tries to accommodate by ramping up production, we are going to have times of glut and times of shortages. As producers, we have to try and ride the waves, not getting overly bullish or overly bearish...i.e. NOT getting ourselves overly fat!
As we sit here today, there is no question in my eyes that we may soon run into a glut of supply, especially "IF" global weather patterns cooperate. You can no longer ignore the fact that every country in the world is deeply concerned about "food security."
There are fields being cleared, agricultural technology is being ramped up, massive grain storage facilities are being built, and everyone is preparing for a possible shortage of food in the next quarter century. As the world frantically tries to gain ground on demand, the scale is constantly tipping back and forth trying to find just the right balance. For about the past 18 months the scales had shifted towards the world being short of "supply." Now as the world accommodates it looks as if we may add a few extra pounds, tilting the scale back in the opposite direction.
Some continue to argue the fact, but I believe the "wildly bullish" may simply be too deep in the forest to actually see the trees. I understand the basis is abnormally tight in many areas. I also understand farmers are reluctant to sell in your home town, but I also see a much broader picture:
- A picture that shows feed wheat in the Black Sea region, and now wheat out of Australia being scooped up in large quantities by those who had been buying US corn. Japan, China, now possibly Mexico...
- I see Argentina being almost approved to export corn into China and Mexico. I see Ukraine corn adding to our competition as well.
- I see massive supplies and better quality soybeans being offered out of South America, prompting traditional US buyers to source more from South America and less form the US. We are now some 35% behind pace in export sales. I think we will improve, but still we will end up well behind pace.
- I see good weather and early planting in South America is going to allow them to offer soybeans to importers much earlier than they have in the years past. In fact, China is already booking late Jan early Feb beans from SA, whereas they most always book those shipments from the US.
- I see an early planted soybean crop in South America allowing for more second crop corn acres to be put in the ground. In fact, I am hearing in many parts of SA corn seed is sold-out as producers are ramping up to plant more second crop corn than ever before. Some talking that second crop corn production in Brazil could surpass the regular crop production this year.
- I see a US corn crop that could end up with 95 million acres being planted and possibly 14 billion bushels of production if weather cooperates. Keep in mind we are coming off two back-to-back poor production years. The odds of a third are far and few between (though some will argue things happen in 3s).
- I see Russian exports going from less than 4 million last year to almost 20 million this year. I see Ukraine exports jumping from close to 4 million last year to over 8 million. I see Kazakhstan exports doing the same.
- I see Australia getting ready to harvest a bumper wheat crop and driving price competition in the Southern Hemisphere lower.
- I see players in the EU like France (who was the world's second largest wheat export last year) loosing clients right and left to cheaper more convenient exporters. Leading me to believe they too will need to get more competitive in the weeks and months ahead.
- I also see an extremely nervous investment crowd. A crowd of Hedge Fund, Index Mangers and Swap Dealers who are deeply concerned about the European Debt Crisis and the contagion affects it may have on global banks. This is leading me to believe we will have fewer investors with big muscles to push the price rock up a seemingly steeper hill.
- I also see a speculative trading environment that is now more deeply concerned about the validity and safety of their capital than ever before, following the recent MF Global debacle. This also has the regulators on edge and looking to tighten the reigns in the commodity markets.
My point is, this is a heavyweight bout and we are early in the fight. "Demand" was the clear cut winner the past couple of rounds, as "supply" had its bell rung by a stiff uppercut (poor growing conditions). This round looks as if it will be more of a split-decision with global "supply" seeming to have finally gotten its legs back underneath itself.
My fear moving forward is momentum might allow "supply" to win the next couple of rounds, thinking "demand" may simply have punched itself out of the fight too early, and will need a couple of rounds to regroup in preparation for a flurry later down the road. Be smart when betting on this match-up. Most of us have had the privilege of seeing these two duke it out in the past, so you know it is extremely rare for one to completely knock the other out.
As you start to place your bets on "Supply" just keep in mind that "Demand" is extremely sneaky and very resilient. In the past he has looked to be down and out for the count, only to throw a last second haymaker, that sends "supply" reeling. With that, the crowd goes wild and the fight is back on.
I am assuming if you are the corner man for "supply" (bearish the market) then you will be telling your fighter to lookout for South American weather, as it truly is the only punch "demand" has left in the upcoming round that could do any substantial damage. If you are working the corner for "demand" (bullish the market), there are several more combinations and punches that you have must tell your fighter to be concerned with. You have the "one-two" coming out of Brazil and Argentina.
You have the "left-hook" from Australia and the Black Sea Region, and you have the possible "round-house" knockout (that is very well disguised) to look out for if the European Debt problems continue to spread. All I can tell you is being the corner man for "supply" sounds a whole lot easier right now than trying to coach in the opposite corner. There is simply too many pushes coming at "demand" right now. The best advice for "demand" is to simply tie-up, stay off the ropes, and try to make it out of this next couple of rounds without getting completely knocked out.
In my opinion, if we can weather the storm and keep our head above $5.00 in corn and above $10 in soybeans, we can make it threw the next two rounds and possibly mount a rally. We are obviously going to need to see some production type glitches for this to occur. I am afraid if not, "supply" wins the next round (the South American production year), and will also cruise through as any easy winner through the following round (the US production year).
I am telling you now, if "supply" unanimously wins those two rounds, "demand" will be fighting a long road back. Just like in boxing, once you get down by a large number of rounds to a skilled opponent it makes it tough to comeback. If South America makes it through the production year unscathed, and we throw 95 million corn acres in the ground with a 165 type average yield...Demand will need an unexpected knock-down to get back in the fight!
Thanks for reading, I hope this helps. Remember, this is only a small portion of my Daily Report that comes out every morning. For more of my thoughts on the Fight between "supply" and "demand," go ahead and sign-up for the 30-Day trial of my daily report, no obligation. Simply sign-up by click here Van Trump Report