Why I Am "Neutral" the Ag Commodity Markets
Dec 07, 2012
Instead of hitting you with a ton of data and number, I would like to this opportunity to explain why I believe a "neutral" position in the Ag commodity markets is your best bet at this point in time.
As we have come to learn in life, "timing" is everything. For me, I can not recall a period where "timing" could be more uncertain. For those of us in the Ag world, especially here in the US, we are looking straight down the barrel at what certainly seems to be the continuation of an extremely damaging drought. We have had close to 700 record temps set across the US in just the past five days. 2012 is more than likely going to go in the record books as the warmest ever for the lower-48. To say the least conditions are extremely dry and producers are becoming more and more concerned each day.
As producers we all know the winter months will doubtfully have what it takes to replenish the soils to their normal levels, therefore you have to believe we are going to head into the spring planting season somewhat drier than normal. How dry?...Who knows! But I think it is definitely safe to say we are going to be dry. In fact, well respect weather analyst Dr. Elwynn Taylor, (who will be at our upcoming 2013 Outlook Seminar in February), seems to believe the US corn crop will have a tough time yielding anything over 150 bushels per acre. I heard reports circulating yesterday that Dr. Taylor was thinking more like a 147 bushel per acre yield would be more realistic. Taylor also went on to point out the three driest years since 1950 have been 1956, 1988, and 2012, and in each earlier case the following year also received below normal precipitation. So for argument sake let's simply assume we are going to be dry, to what degree is the unknown.
Let's also consider there is also some talk that up to 25% of Ukraine and Russian winter wheat may be at risk of winterkill, thanks to similar warm temperatures and dry conditions which have left the crop ill-prepared for the extreme winter dormancy period. There are also some production problems in Australia and Argentina that can be included in the mix. Let's put it this way, there is definitely enough "weather" concern to make you want to be bullish.
Demand seems to be more of question mark, especially for corn and wheat. Not only are "exports" way behind pace but there is also some concern about domestic usage as well. Needless to say the "weather" uncertainties are currently trumping any and all "demand" uncertainties that have arisen. If you are solely playing the "fundamental" picture and buying into the "sizzle" associated with the weather story then you have to be playing the game exclusively from the bullish side of the fence.
For me, there is simply more to this game than just the "fundamentals" and the hype associated with the weather. However, maybe for the time being, I am making it out to be more complex and difficult than it needs to be...but I doubt it.
In my world "money-flow" remains king. Without the buy-side money flowing into these markets prices could take a quick tumble. In my opinion there are so many uncertainties with the world's top economies it has become increasingly more difficult to see any clear cut direction.
Washington is a complete mess and no one is certain how the "fiscal cliff" situation is going to unfold. Everyone seems to have a different opinion about what could or will happen to the US dollar, and no one can accurately explain how the funds are going to react to the new taxes, rules and regulations set to come down the pipe as we move forward.
In the worlds second largest economy (China), you have Yum Brands and McDonald's both showing an unheard of 4th quarter setback in "same-store sales." A sign that tends to be a precursor to weaker consumer spending and a shrinking economy. Remember, in 2007 faltering US restaurant sales where ignored by most investors and we walked directly into the largest economic meltdown of our time here int he US. Just be careful thinking China is back on track and all is well and rosy.
Europe is completely turned upside down and is in a hole so big its only a matter of time before something major happens, like Greece pulling out of the EU or some type of major default.
Japan is close to going over their own "cliff" as spending continues to push their "debt-to-GDP" ratio off the map. If you asked many analyst they would tell you Japan is actually in worse shape than any of the others. This is somewhat scary considering Japan is the worlds to importer of corn. This is country and and economic situation that definitely makes me nervous moving forward.
To summarize, the worlds top-four economies are treading on very thin ice and there is absolutely no clear sign of direction. As you know, when there is "uncertainty" in the macro markets it often causes "fear," in return fear causes the big players to hesitate or in many cases simply move to the sideline.
Even though I outlined a bullish "weather" play up above, saying that the "sexy" weather story is currently trumping most all negative "demand" stories, I believe global economic uncertainties and the lack of money-flow could ultimately trump the weather story. Therefore I am electing to play the game extremely close to the shore, with next to nothing at risk and very few positions in the water.
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