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Nine Things That Could End the Commodities Bull Run

Justin Rohrlich December 20, 2010 11:10AM|

       Money manager Shawn Hackett provides a rundown of what the coming year may bring for agricultural commodities markets.

Shawn Hackett, founder, president, and CEO of Hackett Financial Advisors, a money management firm with a specific focus on agricultural commodities, has some thoughts for farmers, end-users, and investors as we head into 2011.

In a letter to clients, Hackett lays out what he believes to be “the biggest risks to ending the current wild bullish one way trade in commodities.” He also goes over the markets that remain “in his bullish corner,” and coffee, which Hackett says is “no longer a value commodity but has all the makings of a wild near term spike trade to develop.”

Hackett cautions investors that they must believe nine specific things must take place for them to be as bullish on “most commodities for the duration of 2011” as they were in 2010.

To wit:

1) That the recent historic spike in commodity prices will have no impact on rationing global demand.

2) That the recent historic spike in commodity prices will have little impact on expanding global production.

3) That the recent aggressive monetary tightening measures taken by the Chinese government and the Indian government will have no impact on slowing down their respective economies.

4) That Mother Nature will be as adverse in 2011 as she was in 2010 creating further supply constraints.

5) That already record net long speculative positions on behalf of hedge funds and Index funds will expand even further to new all time record highs fueling further commodity price gains.

6) That the US Dollar will continue to erode into the abyss against comparatively faulty fiat currencies everywhere else in the world.

7) That the recent spike in US interest rates will have no impact on slowing down the overleveraged US economy.

8) That the European debt crisis has been contained.

9) That there will be no black swan event in 2011 to disrupt the current record bullish sentiment in commodities.

Hackett maintains that “There will be a time … in 2011 when the sky will be falling, commodity markets will be crashing and sentiment will be entering the morose state of investor apathy. Those are the times, similar to what we saw in the spring of 2010, where those that have powder dry and cash to put to work will be in the driver’s seat.”

He sees “pockets of value” in cocoa, lumber, milk, and natural gas, but is “hyper-bullish” on rice.

The global stocks to usage ratio in rice remains near 20-year lows even with faulty over bloated global rice production estimates. As those numbers begin to fall in the months ahead, the rice market is set up for another major spike rally to play catch up to the other grain markets,” Hackett explains. “At current prices for rice, in relation to other grains, rice will be a big loser in the acreage battle and this potential global loss of global acres make this market the cream of the crop for investment in 2011.

On the short side, Hackett is keeping an eye on cotton and sugar.

“The profit opportunity in these markets is historic. I may even recommend put options in these markets as an alternative to straight futures shorts to mitigate the current volatility risk present in most markets,” he notes.

As for coffee, Hackett believes that:

... last week’s price action could set in motion a straight up vertical spike that is reminiscent of every prior major bull market move in coffee’s past. Another period of torrential rains in Colombia and Central America have dampened any hopes of a production rebound in this region that the roasters were hoping would help ease the extreme scarcity of high quality mild washed Arabica coffee. It is now clear that current production will likely not be any better than the last two years and this could certainly push coffee over the tipping point into a wild panic stricken demand rationing orgy. The coffee market has been building for this moment for the last decade and I see no way out of the structural problems that currently inflict the industry that has lacked investment for so long and whose roaster community remains in denial about the harsh realities of what awaits them over the next 12 months.

If Hackett’s predictions play out, such a scenario would exert downward pressure on stocks like Starbucks (SBUX), Green Mountain Coffee Roasters (GMCR), Peet’s Coffee & Tea (PEET), Farmer Brothers (FARM), and Coffee Holding Co (JVA).

According to Hackett, “This is a high risk game for investors as the volatility will be wild but the prize at the end could be one for the record books.”

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