A Commodity Bull Run, If You Can Eat It

Egypt certainly affected commodity markets.  Brent Crude oil topped $100 bucks a barrel. Oil in the US rose in sympathy.  But the real action was in things that you could eat.  Wheat, Sugar, and meat all ran up to record highs.

In $CME’s hog market, the April contract went on a tear.  Egyptians don’t eat that much pork!  But, South Koreans do.  Combine the hoof and mouth disease in SK, a rumored viral infection in South Dakota, a massive snow storm blowing through hog country and the ingredients were there for a good old fashioned rally.  Besides that virtually every spreader in the market was short April against every other contract on the board.

The hog action wasn’t pretty.  If you are a grain trader, it was similar to what happened in the wheat contract a few years ago.  Carnage.  As a trader, I never like to see my brethren lose money.  It’s not pleasant, and it never brings a smile to my face.  Traders lay it on the line every day.  They know they’ll win some, and lose some, but when a market reacts like this one did it has everyone shaking their head.

Let’s just say there were not good fundamental or seasonal reasons for the market to act the way it did.

Stock futures tread water, they were bid slightly.  If you are trading the stock market this year, too bad.  There is little or no action over there.  The intraday volatility is dying.  If I were trading the VIX, I’d be short, and selling on rallies.  Psychology in equities has changed.  Everyone is waiting for the big pullback and new cash isn’t being committed to the long side.  It’s a simmering market.  Something will give there, but it’s going to take a pretty big force to move it, as long as Ben Bernanke and the Fed continue floating money into the market.

Grain markets all have a bid. It doesn’t seem to matter about fundamentals there either.  Just close your eyes and buy them.  If it goes against you, write a margin check and wait.  They’ll be tearing to new highs again.  Saudi Arabia is buying wheat, China can’t get enough grain, and it seems every other country is in the market too.  There is no standing stockpile of supply.  If we have a bad crop this year, look out.  Beans at $25 might not be out of the question.

Cropland is reaching bubble status in the Corn Belt.  Since government subsidies account for 40% of the crop, the land becomes more expensive.  Farmers are planting their crop with 40% less risk. This ethanol subsidy is affecting other markets big time.  Here is the rub.  As incomes grow world wide, there is more demand for higher quality protein in the diet.  The only way to get more protein is expand the cattle and hog herds.  But, with grain prices sky high, the rancher/farmer says, “I can’t expand the herd because I can’t afford to feed them.”  Instead, they liquidate the herd-drving near term prices lower and long term prices higher.  Hence, the reason why virtually every hog trader was short April hogs.

When meat gets liquidated, it takes Mother Nature a period of time before the supply can be rebuilt.  I know they are trying to grow meat in a lab, but I prefer my bacon out of a farm.   Meanwhile, the hot money continues to flow into commodities and agriculture stocks.

This image says it all for me regarding commodities.

It’s from the Wall Street Journal, and it is a Chinese farmer that is hoarding cotton.  7700 pounds of it. He is waiting for higher prices.  I wonder how many other commodities are being hoarded?  When I see things like this it reminds me of the old Peter Lynch adage. He said something like,  ”If you go to cocktail parties and everyone is talking stocks, it’s time to sell.”  Part of me thinks the same adage might be true for some commodities.

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