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The Week Ahead in Agricultural Commodities With Shawn Hackett

Justin Rohrlich November 22, 2010 11:00AM|

       Introducing Minyanville's regular Monday look at where the ag markets are headed, with money manager Shawn Hackett, founder and president of Hackett Financial Advisors..

Today, we’re introducing a new feature on Minyanville -- an inside look at the week ahead in agricultural commodities. Every Monday, Shawn Hackett, founder and president of Hackett Financial Advisors, a Florida firm with a specific focus on the ag sector, will tell us what’s on his radar.

“The week of Thanksgiving tends to be a week that doesn’t dictate much,” Hackett tells Minyanville. “Volumes get really light, it’s usually pretty quiet, but I still have a few things on my mind.”
An Extended Period of Correction Has Started to Appear

“An overall picture has started to assert itself that shows we’re in an extended period of correction in the commodity markets in general,” Hackett says. “A week ago, when we had that first big break, it set off what is likely to be at least a three-month correction, in my view -- and it could be as long as six months, depending on the bearish factors in play.”

Whither the Speculators?

“We went through an unbelievably speculative period between August and October,” Hackett notes. “We’ve never seen anything like it before. A lot of hot money was coming in, and had an extreme overweighted position with everybody on the buy side, and very few on the short side. That’s usually when the tide begins to turn and you get a violent reversal, which is what we saw last Wednesday, Thursday, and Friday.”

Avoid the Temptation to Buy In Too Quickly

“Once that pendulum starts to swing the other way and the money starts wanting to get out, it tends to stay out for a while,” Hackett explains. “It’s going to take a while to recalibrate this back to normal levels again. It won’t be a week or two, so the average investor should bite his lip and be patient. The biggest mistake I generally see is everyone wanting to buy that first big break, which is usually way too early. This is not going away tomorrow; this is an opportunity that will be with us for a while.”

The China Connection

“The biggest #1 fundamental factor to keep an eye on is the headwind created by China attempting to slow down their economy,” Hackett says. “They’re raising rates, raising bank reserve requirements, curbing speculative activity in the commodities market -- really trying to dampen food inflation. And they will. Until that inflation is dampened, that headwind is with us. There are other things in the mix of course, like European credit problems rising again, but first and foremost is China. That will make it very difficult for ag to go higher for a while.”

When to Look for an Entry Point?

“It’s not time to get long until the correction matures,” says Hackett. “When there’s a further correction in prices, when you see signs of exhaustion, when the speculators have gotten out, and when China’s ready to fire up again -- and they will be -- you can start thinking about getting long.”

What Are the Most Vulnerable Commodities?

“There are three that are especially vulnerable,” Hackett says. “And those are the ones the Chinese buy the most: soybeans, cotton, and sugar. If you’re into shorting, Brazilian sugar producer Cosan (CZZ) could get hurt, while on the long side, a name like Imperial Sugar (IPSU), a processor, could benefit from lower prices. So could candy companies like Hershey (HSY) and Tootsie Roll (TR). But, I’d tell the average investor to simply have a wonderful holiday and relax on the sidelines right now.”

The One Ag Commodity Not Affected by China

“There are a few commodities that have very little of their price discovery tied to Chinese demand,” Hackett says. “Cocoa, for example, is still predominantly driven by US, European, and Japanese demand and has very little, if any, of the Chinese demand premium priced in. It’s a “non-correlated ag asset,” meaning it could go up while others are going down. Cocoa is also the only agricultural commodity where we did not see this big money flow and wild speculative activity -- in fact we saw the exact opposite. Right now in cocoa, we have record short positions, but the fundamentals are in great shape. It’s much more important to look at the micro picture with cocoa, rather than the macro. Unlike corn or coffee, the cocoa market is not as well understood as many others. People who are in cocoa are people who really know what’s going on and usually own it for the right reasons, so when it moves, it generally moves for a good reason.”

The Bottom Line

In short, enjoy your Thanksgiving. At the moment, patience will prove to be as much, if not more, of a virtue than ever.

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