Market analyst: Put up or shut up
02/18/20 — It’s late February, the time when crops are being harvested in northern Brazil and getting ready to be harvested in southern Brazil. Argentina’s harvest follows quickly. So-called experts are forecasting another record SAM crop, but if you look at rainfall patterns in Brazil the past 60 days, the odds of a record crop are quickly diminishing.
This is also the time when U.S. farmers make final decisions on crops to plant in 2020. So far, this has been the winter of discontent for many farmers as very few crops project a profit in agriculture when once again we make decisions on what to plant. Last year, prevent plant was the most profitable crop!
It has been a difficult past six years as prices have stalled out at or near the bottom of the long term price range the entire time. There has been very little opportunity to sell at a profit the past six years. In fact, breakeven was even an elusive target much of the time. To be successful, you had to be extremely effective in your sales, selling essentially the entire crop whenever prices broke above breakeven. Some years it didn’t even happen. Other years, it appeared for only a very brief time (like less than one month). But that was your opportunity, and you had to take it when it presented itself.
But nothing lasts forever, and it now may be time to switch gears. In marketing, typically what worked last year doesn’t this year, and that old strategy to sell at break-even has worked too well in the past — the entire world of market advisors wants to use it again. But the “times they are a changin’,” as Bob Dylan once wrote. We are seeing signs that the six-year-old pattern of low prices is about to change. The best part about that is almost no else sees it happening. So when it does, the market reaction will be stronger.
Frankly, we wonder why at near six-year lows — after a breakout in corn and upside reversals in soybeans (May19) and wheat we don’t own even more of past production sold. In fact, with perhaps the best opportunity to own grain in perhaps six years, why shouldn’t we own at least two years of production? As we roll into spring, it’s highly likely to go up, and after breakouts last year, the upside potential is quite high and downside risk minimal when buying at or near lows.
When everyone is bullish, sell! In 2012, we sold three years of production when everyone else was bullish at $6.50-$8 corn — 30% profit margins (the highest I’ve ever seen) —and basically blew every other marketing firm out of the water by selling when everyone was bullish. Now, the opposite situation exists as everyone is bearish, so why not own two years of production at the lows/beginning of an uptrend —buying when everyone is bearish at the end of a long, six-year bottom?
My market comments last week are worth repeating.
One thing that is prevalent in 2020 is the negative market attitude that almost everyone has. It’s as if the bottom of the market will last forever (and we are at the bottom of historical prices), and prices will never go up. I am taking the opposite view — that prices are already at the bottom, and there is almost no risk left from these levels at a tired, six-year old bottom. The last thing in the world I want to do is sell now, as you pretty much cement selling at the bottom of the market if you do. In contrast, I think today might be the best buying opportunity I have seen in 6 years.
Why am I bullish? I have noticed some positive developments since last May that I cannot ignore.
1. Soybeans bottomed on monthly charts, with an upside reversal in May19 that has not been violated to date. In fact, the uptrend line has held through the past nine months perfectly.
2. Corn broke out of a five-year bottom range last May, projecting improved corn prices the next five years.
3. Trade agreements galore have been approved in the past six months, including Japan, Mexico, Canada, and China — our biggest trade partners.
4. More trade agreements are likely, including Phase 2 China, the United Kingdom, and the European Union.
5. We came off a disastrous production season last year, with 20 million acres of prevented planting (almost 10% of corn/soy acreage) and 5% below trend yields in corn and soybeans. Do we really have plentiful supplies?
6. It’s likely we’ll have 10-20 million acres of prevented planting again in 2020 with some spring adverse weather.
When everyone is bearish, buy! That’s an old trade rule, and perhaps the reason it is so successful is it catches everyone leaning the wrong way. Is that the situation now?
It may be time to “put up or shut up” as we used to say at Midway, my old high school.