Wheat - Its Only Just Begun
I've posted this article before but make no excuses for posting it again. Its worth noting that this article was first published in Money Week on 27th Feb 2008. Spookily, check it out if you don't believe me, Chicago May wheat topped out at an all-time high of $13/bushel on 27th Feb 2008:
You may not have realised it, but one commodity is currently seeing the greatest bull market in its entire history. Not gold, not oil – but wheat.
From its low of $2.40 in late 1999 to yesterday’s high above $12 is an eight-year, near-400% move. Wheat has never moved up so much.
I don’t mean to sound like a harbinger of doom, or perhaps I should say Grim Reaper, but the whole grains sector – whether it’s wheat, corn, soybeans, barley, whichever – has become worryingly reminiscent of uranium this time last year.
The shorting opportunity of a lifetime may be just around the corner…
First let me recap on what happened to uranium. By the end of 2006, come New Year prediction time, uranium was the hot tip for 2007 (just as grains were this year). For five years or more the price of uranium had crept up beautifully, without anyone appearing to notice.
Then suddenly in October 2006 the well-documented flood at Cameco’s Cigar Lake mine made the headlines and everyone began talking uranium. “Supply can’t match demand,” declared the bulls. “China’s building so-many thousand nuclear power plants a year,” they went on. “Where’s the uranium going to come from?” “It takes ten years to get a uranium mine into production”; “Nuclear power is the only answer to the coming energy crisis”, and so on.
The thing is there was a great deal of truth to all these arguments and the uranium price went from a steady incline to a near-vertical ascent. Having stealthily risen from below $10 a pound to $70, it suddenly bounded another $70 to $140. Everyone was talking uranium. Every exploration company had suddenly added the word uranium to its name. Stocks were soaring. Even the Labour Government began talking nuclear. Then suddenly the stocks capitulated and over the next few months we saw brutal corrections in the uranium companies - in some cases, of 80% or more.
Uranium had traced out the typical pattern of a bubble from boom to bust. I have posted this excellent chart from Jean-Paul Rodrigue of Hofstra University before. But it merits re-posting. The typical small uranium stock traced a very similar pattern and in my view, grains may be doing the same.
Grains: the risk is to the downside. Take a look at the chart for wheat. Does it look strangely familiar? This, my friends, is an accident waiting to happen.
Yes, I know all the arguments. Asian diets are improving, their middle class is growing, they’re eating more meat, more grain has to be grown to feed the livestock, the drought in Australia has hit wheat supply, the Americans are using their corn to make ethanol, more fields are being turned over to corn, inventories are low, supply can’t meet demand, monetary inflation means higher prices in everything, what if we get bad weather and it kills the harvest?
I know all of this. They are all utterly convincing arguments that hold a great deal of truth – it’s because of this credibility that more and more people are climbing on board and pushing the price up further.
Nevertheless the price has got way ahead of itself in my view and is due a correction, potentially a nasty one. All the risk is to the downside.
This bull market began in 2000, but until very recently nobody was talking about it. Now the world, his wife and their shoeshine boy seem to be long grains. Not a good sign.
Great bull runs often end with a series of limit-up days (this is when the maximum daily move on the exchange is reached – unlike the FTSE 100, some smaller exchanges try to control volatility by limiting how far a price can rise or fall in a single day). We saw three limit-up days in a week a fortnight ago. The 30c limit has now been upped to 60 cents. We saw another limit-up on Monday and again yesterday. Is this your classic blow-off top? Many chartists would say so.
Looking at previous bull markets in wheat, the biggest was in the six years to February 1974 in which we saw a 312% move. Before that the biggest move was 173% in the four years to May 1898! In other words, as I pointed out at the beginning of this email, this eight-year, near-400% move, is the biggest in wheat’s history.
The subsequent corrections in virtually every major bull market in wheat saw it give back almost all of its gains. “Give back all of its gains?” I hear you say. “But that would take us back to $2.50 a bushel. Wheat’s up by over $2.50 this month alone.”
What goes up …
Buy meat, not wheat
One of the consequences of the high cost of grain is that it has become expensive for farmers to feed their cattle and pig. In fact, it’s so uneconomic many have been sending their livestock to an early slaughter. This has led to there being rather a surfeit of meat on the commodities exchanges with the resultant steep decline in the price of hog and cattle (this despite the rise of the new meat-eating middle-classes in Asia we hear so much about).
Further down the road, as more stocks are slaughtered, what surely lies in store is a shortage of pig and cattle to eat all this wheat. Meat, not wheat, is where you should be looking for an entry point in the coming months. As for wheat, your eyes should be looking towards the exit.
The thing is there was a great deal of truth to all these arguments and the uranium price went from a steady incline to a near-vertical ascent. Having stealthily risen from below $10 a pound to $70, it suddenly bounded another $70 to $140. Everyone was talking uranium. Every exploration company had suddenly added the word uranium to its name. Stocks were soaring. Even the Labour Government began talking nuclear. Then suddenly the stocks capitulated and over the next few months we saw brutal corrections in the uranium companies - in some cases, of 80% or more.
As a footnote to this article, here is a chart of the LIFFE May wheat future:
May LIFFE Wheat
Spot anything? What was that song by the Karen Carpenter again?
You may not have realised it, but one commodity is currently seeing the greatest bull market in its entire history. Not gold, not oil – but wheat.
From its low of $2.40 in late 1999 to yesterday’s high above $12 is an eight-year, near-400% move. Wheat has never moved up so much.
I don’t mean to sound like a harbinger of doom, or perhaps I should say Grim Reaper, but the whole grains sector – whether it’s wheat, corn, soybeans, barley, whichever – has become worryingly reminiscent of uranium this time last year.
The shorting opportunity of a lifetime may be just around the corner…
First let me recap on what happened to uranium. By the end of 2006, come New Year prediction time, uranium was the hot tip for 2007 (just as grains were this year). For five years or more the price of uranium had crept up beautifully, without anyone appearing to notice.
Then suddenly in October 2006 the well-documented flood at Cameco’s Cigar Lake mine made the headlines and everyone began talking uranium. “Supply can’t match demand,” declared the bulls. “China’s building so-many thousand nuclear power plants a year,” they went on. “Where’s the uranium going to come from?” “It takes ten years to get a uranium mine into production”; “Nuclear power is the only answer to the coming energy crisis”, and so on.
The thing is there was a great deal of truth to all these arguments and the uranium price went from a steady incline to a near-vertical ascent. Having stealthily risen from below $10 a pound to $70, it suddenly bounded another $70 to $140. Everyone was talking uranium. Every exploration company had suddenly added the word uranium to its name. Stocks were soaring. Even the Labour Government began talking nuclear. Then suddenly the stocks capitulated and over the next few months we saw brutal corrections in the uranium companies - in some cases, of 80% or more.
Uranium had traced out the typical pattern of a bubble from boom to bust. I have posted this excellent chart from Jean-Paul Rodrigue of Hofstra University before. But it merits re-posting. The typical small uranium stock traced a very similar pattern and in my view, grains may be doing the same.
Grains: the risk is to the downside. Take a look at the chart for wheat. Does it look strangely familiar? This, my friends, is an accident waiting to happen.
Yes, I know all the arguments. Asian diets are improving, their middle class is growing, they’re eating more meat, more grain has to be grown to feed the livestock, the drought in Australia has hit wheat supply, the Americans are using their corn to make ethanol, more fields are being turned over to corn, inventories are low, supply can’t meet demand, monetary inflation means higher prices in everything, what if we get bad weather and it kills the harvest?
I know all of this. They are all utterly convincing arguments that hold a great deal of truth – it’s because of this credibility that more and more people are climbing on board and pushing the price up further.
Nevertheless the price has got way ahead of itself in my view and is due a correction, potentially a nasty one. All the risk is to the downside.
This bull market began in 2000, but until very recently nobody was talking about it. Now the world, his wife and their shoeshine boy seem to be long grains. Not a good sign.
Great bull runs often end with a series of limit-up days (this is when the maximum daily move on the exchange is reached – unlike the FTSE 100, some smaller exchanges try to control volatility by limiting how far a price can rise or fall in a single day). We saw three limit-up days in a week a fortnight ago. The 30c limit has now been upped to 60 cents. We saw another limit-up on Monday and again yesterday. Is this your classic blow-off top? Many chartists would say so.
Looking at previous bull markets in wheat, the biggest was in the six years to February 1974 in which we saw a 312% move. Before that the biggest move was 173% in the four years to May 1898! In other words, as I pointed out at the beginning of this email, this eight-year, near-400% move, is the biggest in wheat’s history.
The subsequent corrections in virtually every major bull market in wheat saw it give back almost all of its gains. “Give back all of its gains?” I hear you say. “But that would take us back to $2.50 a bushel. Wheat’s up by over $2.50 this month alone.”
What goes up …
Buy meat, not wheat
One of the consequences of the high cost of grain is that it has become expensive for farmers to feed their cattle and pig. In fact, it’s so uneconomic many have been sending their livestock to an early slaughter. This has led to there being rather a surfeit of meat on the commodities exchanges with the resultant steep decline in the price of hog and cattle (this despite the rise of the new meat-eating middle-classes in Asia we hear so much about).
Further down the road, as more stocks are slaughtered, what surely lies in store is a shortage of pig and cattle to eat all this wheat. Meat, not wheat, is where you should be looking for an entry point in the coming months. As for wheat, your eyes should be looking towards the exit.
The thing is there was a great deal of truth to all these arguments and the uranium price went from a steady incline to a near-vertical ascent. Having stealthily risen from below $10 a pound to $70, it suddenly bounded another $70 to $140. Everyone was talking uranium. Every exploration company had suddenly added the word uranium to its name. Stocks were soaring. Even the Labour Government began talking nuclear. Then suddenly the stocks capitulated and over the next few months we saw brutal corrections in the uranium companies - in some cases, of 80% or more.
As a footnote to this article, here is a chart of the LIFFE May wheat future:
May LIFFE Wheat
Spot anything? What was that song by the Karen Carpenter again?