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Hackett Advisors in the News


Grain Markets Are Hot, But Is it Too Late?

Justin Rohrlich September 15, 2010 11:15 AM|

       One ag expert says you should be bearish, but another chance to invest is coming.

Investing in agriculture is as trendy right now as JDS Uniphase (JDSU) was in 1999. But money manager Shawn Hackett, founder and president of Hackett Financial Advisors, a firm with a focus on agricultural commodities, believes the dance will soon be coming to an end.

“When the speculators got excited about the grains was when the wheat market took off,” Hackett tells Minyanville. “If you remember, they were record short before that. Then they decided to get in. Corn is now the proxy -- everything else follows. Once corn ratchets back down to something more reasonable, the other two -- wheat and soybeans -- will follow.”

With that in mind, is corn ready to drop?

“In the ag markets, specifically, there are certain things that are always indicative of bottoms and there are certain things that are always indicative of tops,” he says. “The money flow in and out of the large speculative funds is a notoriously contrarian indicator. They tend to be the most bullish and the most long at tops. And they tend to be most bearish and most short at bottoms. It happens over and over and over again.”

This is mainly because most of them are momentum-driven funds, Hackett explains.

Right now, we have all-time record long positions, even exceeding what we saw in the first half of 2008, when corn was at a record of seven and a half, which was eye-poppingly high. We’ve already exceeded the speculative fervor we saw in ‘08 and corn’s at five. When you have that much speculative activity at lower prices, the fact that so much has been sold at these relatively low prices suggests that there’s more corn available than there was back then. If we look at what’s really taking place, this isn’t a $5 market. It’s a $4 market. I think we’ve overshot the upside here by probably close to a dollar a bushel.

Falling corn prices would benefit “any company that uses corn.”

Hackett says, “If corn prices were to drop by 20%-25%, that’s good for hog producers, cattle producers, anybody that’s making corn syrup. If I’m making ethanol and corn prices drop from five to four, my input costs go down and my margins improve. I’d be looking at names like Tyson (TSN), Smithfield (SFD), ADM (ADM), Cargill (CAG).”

Hackett also points to the differential between cash prices and futures prices.

“Typically, when we have a healthy bull market, a tight market that needs to go higher legitimately, the cash market tends to follow the futures market,” he says.

When the people who need the physical commodity are bidding it up, if the cash is following or outperforming the futures, that’s a healthy bull market, a legitimate, fundamental supply/demand problem that needs to be addressed. And that’s not what’s happening here. Right now, the differential between the cash basis and futures is widening. Look at the National Corn Index, an average of 1,800 grain elevators around the Midwest. Typically, when the corn market’s cheap, you see the differential somewhere around -25 to -30 cents. When the corn market starts to get carried away, when we get to a -50 cent differential, like we’re seeing now, it’s telling us that the futures market has gone off to the upside but the cash market has not gone up to the same degree. And the cash market is always right -- these are the actual physical transactions. Now, this doesn’t mean the speculators can’t get further carried away, but when the spreads rise to these levels, one should be very guarded. Something’s going to take place in the coming several months that will dampen this fervor. Be very cautious. If you’re a farmer, you should be selling more corn. If you’re a speculator, be bearish.

Hackett makes clear that there will always be another opportune time to get in.

“There’ll be another chance,” he says. “No one knows what’ll happen in the next two days or the next two weeks, but the right time will come again. The easy money is gone. Right now, it’s time to buy the rice market. The lumber market. The cocoa market. They’ve gotten clobbered, but the fundamentals are there.”

“Once again, I’m finding myself a lone soldier here,” Hackett says. “But everything I see suggests that we’re within a few months of a peak. I couldn’t get anyone to buy corn back in June, I can’t get anyone to sell corn right now. Okay, it’s your money, you’re an adult. But I wouldn’t be doing it myself.”

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