July 15, 2024

Commodity Insight: This isn’t 2022

One of the oldest sayings on Wall Street is “sell in May and walk away.” The old adage is based on what the Stock Trader’s Almanac claims is the best six months of the year — namely, November through April.

Thus, selling in May and coming back in November appears to be a wise strategy. However, the theory has several flaws and has not worked well the past few years.

But it did work well in May 2022, but with commodities that did a nosedive. It was the grain complex that showed the most weakness starting in early May 2022.

Chicago May wheat futures fell from $12.85 a bushel to a low a few days ago of $5.94. May corn futures slipped from $8.17 to $6.21 a bushel. May soybean futures dropped from $17.48 to $14.22 a week ago.

The selling in wheat was so pronounced that Chicago futures traded under the price of corn for the first time in two years, a scenario seldom seen in history.

The selling was led by the infamous commodity funds that are now reputed to be short the largest number of short futures contracts in history that exceeds 135,000 contracts.

And all my work suggests the wheat market is now bullish because the funds are holding a monster short position that must be exited sooner than later.

History suggests when the funds are short such a massive position the rally that will unfold as they try to exit the market can be as large as $1 a bushel.

In other words, yes, the Chicago wheat market has collapsed. But now the market has a bullish lean because the funds are holding a massive short position that has to be exited at some point in time.

A major reason corn prices have done a nosedive is because wheat prices collapsed. However, in recent weeks, China has canceled previous U.S. corn purchases, keeping a negative tone hovering over the market.

From “Why is China suddenly canceling purchases of U.S. corn?” by AgWeb: “China canceled more corn purchases this week. As China switches to cheaper sources from places like Brazil, it’s putting more focus on a possible demand problem in the U.S. The canceled sales could also inflate the projected corn crop carryout, which is putting pressure on commodity prices.”

A bearish fundamental for U.S. soybean prices comes down to the record-setting Brazilian soy crop.

According to the U.S. Department of Agriculture, Brazil is on track to produce a record-breaking soybean crop of 153 million metric tonnes, up 18% from a year ago, the largest in 14 years.

Brazilian soybean prices are $1.90 to $2 a bushel under U.S. prices. In theory, it pencils out to import soybeans from Brazil to the United States, something not seen in years.

With the U.S. grain markets doing a nosedive last May, the same scenario was not seen with the U.S. livestock markets, at least not with cattle.

In early May 2022, live cattle futures basis June rallied from $1.42 to a historic high of $1.77 a few weeks ago.

Selling cattle in May 2022 and walking away would have been a huge, embarrassing and costly financial mistake.

But in the U.S. hog futures markets, it would have been a brilliant maneuver. In early May 2022, June lean hog futures were trading around the $111.40 level and a few weeks ago kissed $71.52.

Indeed, as cattle prices rallied to new all-time historic high prices, hog futures collapsed, following the lead of the grains.

The hog futures market did a nosedive as the USDA revised its estimate of the U.S. hog herd showing it underestimated the total hog numbers by 1.8%, which resulted in sharply lower prices.

No doubt the strategy of selling in May and walking away was a brilliant move in 2022 with corn, wheat, soybeans and hog futures, but not with cattle futures.

But that was in 2022. This isn’t 2022, and I seriously doubt such a trading strategy will work so well this year.

This year, ending stocks of old crop soybeans and corn are historically tight. Plus, the entire growing season lies ahead and the most potent El Niño looming large and worrisome.

Until more is known about the weather in the growing months of June into September, the grain complex will be exceptionally sensitive to the whims and ways of Mother Nature, as always.

The downside with grain prices after the collapse that began in May 2022 is likely over. It has run its course until more is known about the growing season that lies ahead.

I remain bullish on old crop corn and soybeans and cattle. This isn’t 2022, where you can “sell in May and walk away.”

At least not with grains and cattle.