Battle For Acreage

So what are you planting this year?  It's the million dollar (and often times much more) question that all farmers are asking themselves right now as planting season looms.  The Delta Farm Press has a great article from the middle of last week that talks to several southern farmers about their intentions.  I know it's an incredibly small sample size, but hey, it's at the very least the thought process of several farmers and why they are going to be doing what they are this year.  It is amazing what people do not understand about this entire process and the incredible amount of pressure there is to make the right judgement this far in advance.  Anyways, here is the link to the article I was talking about.  

With prices going up as high as they are, it will be interesting to see what happens to the market when the USDA planting report comes out shortly.  If there is so much as a hint of underplanting in any one commodity, then you will see a great rise in price on the spot.  Then again, it's not like I'm saying anything crazy here that hasn't been happening since every report ever written, but in the volatile market we have now, it will likely be accentuated.  Hold on and make sure your stops are set appropriately.  

Volatility Perspective from Brad Zigler

HardAssetsInvestor.com's Brad Zigler has an awesome piece this week about the word "volatility" and how it is often misconstrued in the capital markets today. Many people avoid commodities because they feel that they are "way too volatile." This entry into his daily column puts a little bit of science behind unraveling that myth, even in the light of the recent downturn in the commodity market at large. Great piece, I recommend you read it if you are questioning yourself as a trader in virtually any market. It truly puts a good perspective on risk and the relativity of it all.

Brad Zigler's 'Tale of Two Volatilities'

More Pain

Right now I must admit that I am feeling extemely conflicted about the current market.  Part of me wants to pull the eject lever and run for the hills.  The other part wants to stay in out of morbid curiosity and just see what happens next.  Right now there are a lot of investment banks that are changing their leverage and margin requirements, like the company I trade with for example has nearly tripled the requirements of some of the more volatile commodities of late, even the ones with daily trading limits, simply because they've been hitting these limits almost daily for the past week, up and down!  

Then you look across the street and you see fantastic fundamentals lining up.  You see dramatically increased consumption not only in the emerging markets and developing countries, but you also see a new paradigm of using the food that we grow as a source of energy.  All of this demand is mounting and prices are reacting by dropping by record amounts...  It just doesn't add up.  Somewhere, sometime, a more appropriate move to the upside will begin again, and I am sure that I want to be a part of that, it's just this suicide ride right now that I'm unsure of.  I'll keep you posted about how long I hang in and what I'm up to.  

Limit Down Daze

Well, it's been quite a volatile ride recently with a couple of limit down days in a row for several of the softs and there has been some rampant selling for the sake of creating liquidity in the face of broader market troubles.  When one of the oldest and most established investment banks in America goes from $150 a share to being bought for $2 a share less than a year later, something is seriously wrong.  On CNBC's Fast Money tonight, it was put very interestingly.  Bear Stearns survived the Great Depression, a World War, and several market crashes in between, but it should speak volumes about the gravity of the credit crisis that it was the one force able to bring them down.  It is this pressure on credit and lending that has crossed over to influence the highly leveraged commodities market.  

I suppose that beneath it all the good news is that as of right now the fundamentals are still intact for a great year of price appreciation, but it may be a rough ride to get there.  Speculators will continue to move in and out of the market as their credit/liquidity balance allows them, driving prices up and down wildly along the way, but if you keep an eye on it, they should track higher throughout the journey.  

Trade carefully, use stops along the way, and don't be afraid to take profits as well.  Happy trading-

Trading Carbon Credits

There is a really interesting piece written for HardAssets Investor today about the newest commodity to hit the market next week on Monday (March 17th). Carbon credits. Apparently these have been traded globally for some time, but the US until now has been hesitant. I'm not jumping in before I know more about the situation, but it sure seems like a new and interesting play on the new Green Revolution sweeping through the planet.

Read all about the new carbon trading here.

Cotton Party - And You're Invited!

In an article written on March 6th in the Delta Farm Press, an outstanding regional publication for Delta farmers, by Elton Robinson, CEO of Allenberg Cotton Co. Joe Nicosia was addressing cotton producers attending the Mid-South Farm and Gin Show in Memphis. Here are the key points he illustrates with a few direct quotes:

1) Cotton outlook is great for 2009-10

2) "Hang on long enough and prices are going to compete with those of corn and soybeans, Nicosia said. 'In 2009, we start to tighten the balance sheet. We have lower acreage this year, which will decrease our crop size. If we have crop problems somewhere else, it could get interesting. Cotton is going to have to rise to a certain level to compete with the other crops.'" - Sounds pretty promising

3) “To me, if you want to be long cotton, don’t be long in the spot month. Roll it out to the deferred levels and that’s where you’re going to take your real values." - Wow... I mean, I really don't have to interpret this one now do I.

What's the Fed's Next Move?

I know I just got done writing about how I felt that the employment numbers last Friday meant that the Fed was being handed their instructions on when to cut and by how much. Then Bernanke and company decided to pull this little liquidity move today and offer up $200 billion to investment banks. Then the equities markets reacted quite nicely with a jump of over 400 points on the Dow. Pretty impressive. The only problem now is that it re-opens the question of the next Fed meeting. Do they still cut by 75 basis points? 50 basis points? Do they trim it down to 25 basis points after the positive reaction from today? Or is the impossible going to become possible and they don't cut at all and start standing firm and defending the dollar?

Frankly I don't believe the last case to be true, but more and more I find myself being torn about the first two options. I can see the argument that can be made for the 75 point cut because in combination with today's actions, perhaps it is a potent one-two punch that can really be a shot in the arm for the markets at large. However I think the 50 point cut is the most logical and likely after today.

What does this mean? Well, the most basic interpretation is that there is still going to be a cut and that will still continue to devalue the dollar. This will in turn create another surge in currency futures, perhaps not too large since it has been built into the price for a while, but a nice little punch all the same. Commodities in general should do well based on this continued falling dollar.

Overall, the actions of this week are not going to make or break any market, but I am looking for continued strength in the commodities markets going forward.

Agriculture Boom

At the fundamental level of commodities (or equities, bonds, or derivatives etc.) what exactly is it that drives price higher? Demand. Simply put. You can say fundamentals, but demand is the most fundamental concept there is. So why do I mention this now? This article from HardAssets Investor written late last week points out that in just over a year an Index fund had to close to new money because it reached its maximum capacity so rapidly. While there are still relatively very few funds out there invested solely in commodities, and the individual investors like ourselves are in relatively short supply (compare daily volume of corn or even oil to QQQQ sometime just for kicks...), there are more people piling in to this space every day.

Unlike equities where there are IPO's and new corporations formed and new issues of stock released, there simply is a finite amount of space for the commodity investor to roam around in, therefore, whenever it gets crowded, you'll find people paying higher prices just to "get in to the market." For those of you who have watched CNBC for at least a year or more now, sit back and take note of how many times in a day, or hour for that matter, they mention rising commodity prices. This boom is exciting the average investor that wants into the space and index funds want to provide an outlet for them.

The moral of the story is hold on for a great bull market for a while. The internet and news media are the two reasons why I believe that this bull market will be the largest in history. Now have I been trading commodities for 30 years and have a PhD or some grounds to make this statement? No, not really. But what I do know is that the internet is the perfect vehicle to drive information to the masses. Remember the tech bubble of the 90's? One of the largest busts in history since 1929 largely because everyone was in the market! People I didn't know were giving me stock tips, heck, the NASDAQ still hasn't hit those levels again and likely won't for some time. Finally, what I'm saying is that just as soon as everyone wants in, you should be the first to get out!

What Will Pull Us Out of the Downturn?

First of all I must say that I agree with the statement that this is a downturn or a correction, not a new direction for the market.  Now, with that out of the way, the answer to the topic question is this:  institutional buying coupled with speculator reaction.  Speculators helped drive this market as high as it is now, and they are also the ones that are pushing it lower now trying to lock in some profit (whatever is left at this point).  Now, in the face of a rising bull market for the foreseeable future, this is where institutional buyers start coming in and trying to bottom pick what may be some of the best prices for the rest of 2008.  Once this demand is noticed and the speculators start sniffing it out, then back on the march upward we go.  I'm not saying it's a quick process, but it may be.  All together though, commodities are still the place to be this year.

And the good news is...

If you can take the pain, stay in it.  I quite honestly question it myself VERY frequently, but with the jobs number that came out this morning, it truly puts the Fed in a corner and as opposed to taking the hard line and not cutting rates (which according to some was fairly likely) they no longer have much of a choice based upon the current employment situation.  They will likely cut as the equities markets have priced in and this will continue to devalue the dollar making the price of American commodities cheaper to foreign buyers.  From here it doesn't take much of a leap to realize that increased buying (demand) in the face of continued limited supply will steadily cause a price increase.  It is often nice to have some solid fundamentals behind the upswing in price we've been experiencing, aside from the current correction of course. 

Education for Beginners

Some people have asked me where do you even start trying to learn about commodities and trading futures? You can't exactly just turn on CNBC and catch up on the latest trends in soybeans or open up your local paper and find out that the African cocoa crop has been wiped out (and for the record it has not been so don't go trampling anyone just yet). But then again, I suppose we should start out by trying to figure out why either of those issues even matter! For this I will refer you to a few good places to go for education.

The very first one that I would recommend is the book Hot Commodities: How Anyone Can Invest Profitably In The World's Best Market written by Jim Rogers. I know I have already cited him once in the short lifespan of this blog, but he is truly a good person to learn from. The link there is to the Amazon webpage that has a description of the book and how you can buy it. I was lucky, my local library had it and I just checked it out there. Here Jim takes you through the very basics of fundamental commodities investing, demystifies horror stories you hear about "guys that lost everything" in the commodities markets, and then takes you on up through some basic plays and strategies to keep an eye on for the coming years.

If you are more web prone, you can get some good starter information from the Hard Assets Investor website Hard Assets University. This is a completely free program that goes through "classes" like 101, 201, 301 etc. It starts with a very basic entry and moves on up through advanced concepts for active traders. I like this site because it borrows from the knowledge of a large group of authors and is not biased by one individual.

Overall, I would encourage anyone to look beyond these two sources and NEVER utilize only one person's methodology. You truly need to go out there, educate yourself, and develop a trading plan that works for you. If anyone has any other great ideas, leave some comments and we can discuss anything anyone has come across.

A Note on Corrections

Yesterday was a fairly rough day for many of the softs, some even hit limit down. Does this mean it's all over? Absolutely not. This is simply a temporary "correction" in the value of these commodities. There has been no major global surplus harvested in all of these crops in the past 12 hours (a Santa Claus like feat), and short of nuclear war there will be no blights unleashed that will wipe out all global production sending prices skyward either (if there is, I'm afraid we all have something a little more important to worry about than the price of corn my friends). The bottom line is that the fundamentals are still in place, however the short term speculators (like all of us) have driven prices slightly higher than the current market will bear for a few days/weeks. The following information will help paint a more scientific picture for you than just my opinions as to why this is a confirmed bull market that will not end abruptly:

1) Read this interview with Jim Rogers done by the online publication HardAssets Investor (HAI). First, if you don't know who Jim Rogers is, he is one of the premier minds in all of commodities investing and takes a more Warren Buffett long term approach to investing. Second, this article highlights many of his points about the status of our current bull market.

2) Big Red. That's right, that's my name for China. Nothing has changed here last night. Even if their blistering GDP growth slows from 11% to 8%, which by the way would be significant especially with the Olympic Games being held there in a few months, you still have 1.3 billion people that are joining the middle class a the most rapid pace in human history. People in the middle class consume more high quality food products (made from corn, sugar, etc.), wear nicer cotton clothing, and consume more energy (oil, nat gas, and even biofuels). So if you're convinced that Big Red is a fraud, then by all means, sell everything and get out of commodities right now without reading on.

3) Energy. Many people are commodity historians and they look back to past booms to compare this one too and say that, "It can never hold up!" Well, their analysis is based upon domestic population growth and historical consumption data. If you've been under a rock for the last 5 years, first of all welcome to the sunny side, second of all, we're using more and more products from the earth and converting them into energy daily. DAILY. This demand is soaring and has only begun. I truly believe that demand for many of these crops is experiencing the iceberg effect, we have only seen the first 10% of it. Now that's not to say the speculators haven't priced in more than 10%, but I don't think anyone can fathom 100% yet, simply because oil is still just too relatively cheap (don't jump me, I said RELATIVELY) compared to its alternatives.

I'll stop there for now, hoping that I have given you some heart to stay with this market even if it is handing you some lumps.

Current Thoughts on Rough Rice

I read two powerful sources today in regards to the upcoming supply issues with rough rice overseas. The first was in the CME Group daily newsletter (free by the way, just go to their website and sign up!) The artice cited the nation of Vietnam, a major global producer of rice, was having difficulties meeting demands and that prices spiked 3.2% in the past week. They are also not providing any quotes to foreign buyers because they simply cannot meet domestic demand.

Another nation having issues... China. That's right I said it. Big Red. According to rice trading phenom Milo Hamilton, China is also not providing foreign buyers any prices due to their inability to export at this time. Sounds like two nations are bound to become net importers this season. Right now I'd let rough rice contracts settle down, but get in and ride up with the rest of the bull market.

Getting Things Started

Hello and welcome to the Commodity Roundup Blog. The purpose of this blog will be to inform and entertain all commodity investors and traders on a daily basis as I pick my way through the life of a part-time commodity investor. Along the way, I will post my positions and entry and exit points as a reference for all of those who are interested in keeping score (no promises for it to be pretty, just educational). If nothing else, I hope to educate and help out along the way, so please post anything at any time and let's get conversations started!