Grain Markets Are Hot, But Is it Too
Justin Rohrlich September
15, 2010 11:15 AM|
ag expert says you should be bearish, but another chance
to invest is coming.
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.
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.”
that in mind, is corn ready to drop?
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.”
is mainly because most of them are momentum-driven funds,
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.
corn prices would benefit “any company that uses corn.”
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).”
also points to the differential between cash prices
and futures prices.
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,
makes clear that there will always be another opportune
time to get in.
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.”
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.”