For some time I have been quite bullish on a number of markets for a variety of reasons. The two main fundamentals keeping me firmly in the bull camp are climate change, robust demand following the pandemic, the theory that a Commodity Super Cycle has arrived and the reflation trade. All such fundamentals will underpin hard assets for years to come. To make my bias even more lucid, I am bullish towards anything that grows!
In the world of agriculture, the wild card has been and will continue to be Mother Nature, the weather. Normal weather does not spook me. In recent years, however, the phrase, “climate change” has surfaced and all scientific evidence points to threatening weather patterns that are more frequent, more intense and longer in duration than any seen in history. And that is the primary reason I am bullish towards anything that grows.
All markets, great and small, endure two main phases. One is the anticipatory phase, the second is the realizing phase. In the anticipatory phase, market participants recognize a particular commodity has bullish fundamentals and pile onto the long side of the ledger hoping to catch the run-up with values before they miss the boat. However, almost without exception, they are too bullish, too soon. They pile into the long side before the bullish fundamentals assert themselves and prices drop sharply causing the market to collapse.
Then there is the realizing phase. According to my old boss, Roy W. Longstreet, in his classic book, “Viewpoints of a Commodity Trader,” published in 1969: “When one is faced with a realizing bull market, he has an unusual opportunity. The direction is highly probable and the degree is often large. Sometimes the rise occurs in a relatively short period of time. The risk is usually small.”
Mr. Longstreet gos on to write, “The characteristics of such a trade are: 1. A fundamentally bullish situation. 2. A reluctance by the speculators to buy. 3. An inversion or small carrying charge between cash and futures. 4. Bullish interests may be either cautious or bullish.”
Over the past six months, the grain complex has been little more than markets caught in an “anticipatory phase.” Each month, January, February, March, April, May and deep into June, grain prices would rally sharply because ending supplies were historically razor thin and demand robust. Grains rallied because most everyone knew the fundamentals were bullish and they rushed to go long out of FOMO, fear of missing out.
However, the bullish market participants piled into the long side too soon and each and every month after prices rose sharply the market took back what it gave and then some. In fact in June, soybean prices fell $3 a bushel off the high. It was likely the most bearish June in history for soybeans even though the fundamentals were bullish. Yes, the most bearish June in history in face of bullish fundamentals known to all.
But on June 30, the USDA released a grain report regarding ending supplies and new crop acres. It was expected by many that the report would be bearish because grain rallies the previous six months kept failing. And failing miserably I might add.
However, the USDA report was wildly bullish and grain prices ended dramatically higher on the close. The report was crazy bullish! The report data showed that grain stocks will remain razor thin into 2022. The report was a shock to the marketplace and it now seems probable the grain complex has quickly morphed into a, “realizing market” having left the past six months of an, “anticipatory markets” little more than a memory.
But even if the grain complex is indeed in the early stages of a, “realizing market” here are a few more words of wisdom from Mr. Longstreet from his classic book on trading. “Knowledge of the fundamentals of a bull market does not necessarily mean you will be successful in trading. To trade successfully, one needs two things; Knowledge and courage. The knowledge you can learn or buy. Courage cannot be learned or bought. You either have it or you don’t. But you can’t succeed without it.”
I cannot imagine a more bullish scenario for the grain complex to now be locked into a ”realizing phase” with razor thin ending supplies amid threatening weather with the key growing months of July and August ahead. Consequently, I am bullish on anything that grows for this year and the years ahead. Anything that grows.
Go to commodityinsite.com to learn about the, “anything that grows” markets. Get there quickly!