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It's an educational process

In a bull market, logic goes out the window for many participants.

The key question for most in the commodity business is “when will this bull market end?” The answer—not yet, but it will happen. All bull markets come to an end.

For anyone who started in the commodity business since 2013, this is their first real experience in a bull market. Bull markets are difficult. In a bull market, logic goes out the window for many participants. Many of us who have been in the industry for 40 years or more, remember the mid-70s when the bull market was even bigger on a percentage scale than the current one in the grain markets. In the old days, Cook Industry and Continental Grain were major players in the grain markets. Bull markets are always followed by bear markets; it is just a question of when. And when it happens, the financial results can be as devastating on the downside just as much as they were on the upside. The inescapable end of a bull market is always a treacherous time.

Some of you may also remember the days of Clayton Commodity Services founded and owned by Roy Longstreet, a St. Louis area-based commodity trader. Roy Longstreet wrote a book called “Viewpoints of a Commodity Trader” in 1967 and it was reprinted in February of 1997. A philosophical book that every commodity trader should read. The book is out of print, but I assume it can be found on the internet.

In one chapter Roy talks about “fighting a market.” There are a lot of people at that stage right now who sold the market too early and don’t want to give up. Fighting a market never works well. There is a great danger when we become so blindly convinced of being right that it is difficult for us to recognize that we are wrong and, more important to admit that we are wrong. As Roy points out it causes an energy drain and causes us to lose focus on being a creative thinker.

As it relates to the current market, corn prices are indicating that we have a shortage of $3.00 corn. The question is, do we have a shortage of $6.00 corn? Soybeans are in short supply of the $9.00 variety. But will we have a shortage of the $15.00 variety? Both markets are now trading in the top 1/3 of their expected price range. I’m not inferring that this bull market is over. As crushers and buyers of soybeans are well aware, there are not hardly any old-crop soybeans to be bought. The country is out. The downslide will likely begin by declines in palm oil and then soybean oil. Soybean meal has already peaked. At current high prices, farmers around the world will increase soybean production. As pointed out in my April article, we see no need to be covered on the buying side past the end of June.

Cash corn prices made a new high for the marketing year in April. As the chart below shows, the Central Illinois cash price of corn peaked during the month of April only one time since 1970, and that was in 2004. Odds of marking a top start increasing significantly during May or June.



What does lumber have to do with feed buying? Nothing but it is a good exercise in market psychology. Lumber prices have risen from under $300 per thousand board feet a year ago to $1,326 now, more than a fourfold increase. Lumber mills are starting to hoard supplies assuming the market will go up forever. This is a classic bull market where supplies are increasing significantly at the high price levels, and with the high new cost of construction, as soon as demand slows down, and it will, this could end up being one of the biggest commodity price declines in recent history. But the market is not there yet.

The Bottom Line

The grain markets as well as many other commodity markets are now becoming as much psychological as supply/demand based. Granted, during the growing season a weather scare could give a sharp surge higher in prices, particularly soybeans. But be careful. A change in buying philosophy by China could change the direction of soybeans as well as corn in an instant. The corn and soybean crop planting progress in the Midwest is currently ahead of normal. While many are assuming another rally based on weather concerns, what if we end up having good growing conditions? Be patient.

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