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May 30, 2006
As I wrote on May 9th, over the past few years, billions of
dollars in hedge fund money has been attracted to the commodity
markets, resulting in some of the biggest bull moves we have
seen in futures in many, many years. As you are certainly aware,
the preponderance of those funds are on the buy side of the
market and I believe their next logical targets are the major
agricultural crops produced here in the USA. With the energy and
metals markets showing either signs of tops and/or
consolidations, I think it makes sense to expect some fund
monies to see allocations away from the wild swings in those
markets and into markets that perhaps are at the beginning of
bull trends. The funds are primarily
trend followers and when you are having movement such as Gold
reversing $90 in 9 days, this can easily be enough to put many
trending systems on the sidelines...and looking for other places
to put the money. Throw into the mix some rather bullish
fundamentals (such as corn and wheat world ending stocks
expected to be the lowest in decades) and the USA's major export
crops are an excellent place to expect that money to end up.
I have no idea how high any of them could go, or which of them
might go the biggest. I think you just own them all and see what
happens. If just one of them "goes", it could easily offset all
of the other three absolutely going the wrong way. Get a couple
of them going and obviously there is potential for some very
attractive profits...Record highs seem to be the norm in
anything that gets going these days and I see no reason not to
consider that a possibility in Corn, Wheat, Cotton or the
Soybean Complex...All of these positions can be taken with
futures or options...And, with three of the
four markets shown here having recently made new highs following
very long consolidations, I believe you do this NOW...And,
of course, I am obliged to tell you I might be wrong about all
of this...in which case you would most likely lose money.
CORN
I've been pushing the hardest here lately...The
growth of the ethanol industry is certainly a factor but I
think of MUCH more importance is the simple fact China is
beginning to import corn from the United States for the first
time in five years. With World Ending
Stocks in Corn projected to hit better than 40 year lows this
marketing season (and those numbers assume favorable weather),
the price impact of seeing a monster such as China go from being
a net exporter to net importer could be enormous...
The first chart here is astounding when you look at how China's
ending stocks were growing for decades...and then how
precipitously they have been declining for the past seven
years.If there was a one year dip in ending stocks, it might be
attributable to some special event...but by all appearances,
this tighter and tighter stocks situation looks very much like a
major trend that I would not expect to just magically reverse
and start climbing...which suggests one should not
expect Chinese Corn imports to just be a temporary
occurrence...and this would be a BIG deal.
chart: Hightower Report
The World Wheat Stocks situation is quite similar
Corn with the Stocks to Use Ratio projected to be the lowest in
25 years...Ending stocks are what you have left
over from one year's crop before the next crop comes in...Ending
stocks should never fall to zero...Can you imagine, for example,
if world wheat stocks hit zero...and there were still several
months before the next crops could be harvested? The low Stocks
to Use ratio is a measure of how tight stocks actually are.
SOYBEAN OIL
Soybean oil has the same look as Corn and Wheat...Aside from
being found in maybe 95% of the what is on the shelf in
supermarkets, soybean oil is also the primary source for the
growing Biofuels industry...There is no world shortage of
Soybeans but the growth in Biofuels is certainlyly changing the
overall supply-demand picture for Soybean Oil....And this
market, like Corn and Wheat, has recently made new highs for
some reason...
COTTON
Still sitting there in the middle of the range it has been in
for almost three full years...World demand is still running at a
record pace...Weather (particularly in Texas which produces
roughly 1/3 of the USA's production) is becoming more and more
precarious with the Southwest remaining in what is approaching
severe drought status...One old bird who has farmed Cotton in
East Arkansas for 50 years noted that Cotton plants in his neck
of the country (along the Mississippi) should be knee high by
now but are only about the size of toadstools...This is a market
that has a history of suddenly just cranking up and going...and
every time I see it show any sign of strength I "know" this
might finally be it...I think there is a ton of leverage in
December call options....
China is gobbling up cotton as well...I see NO reason for this
to change....
Give me a call if you want to know more...
Bill Rhyne
866-578-1001
770-425-7241
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