Thursday, April 30, 2009

The Debts of the Spenders: Agriculture Retains Strong Fundamentals Amid Stock Market Fluctuations

While equities remain very overbought, commodities - particularly agriculture - retains strong fundamentals and technicals. July corn, wheat, and soybeans are poised for technical breakouts. Even the softs are picking up. I posted about the COT (commitment of traders) a few days ago. By itself the data stated there had been an increase of short positions in commodities (particularly in grains) by funds for the PRIOR WEEK.

I have more or less given up trying to predict equity movements but the action in the Chicago and Kansas trading floors has been easier to folllow. That data is meant to be interpreted as a contrarian indicator in a week w/strong govt intervention: both the FOMC and BOJ made announcements. While the world remains in a deflationary environment, the short term effect of massive money printing is definitely having an inflationary effect. And commodities are the first sector to reflect that change in sentiment. So what we are seeing is a combination of short covering in grains as well as a rally built on strong fundamentals.

1) We are entering a cyclically bullish period of the year for agriculture. Spring is planting season. And planting has been delayed. See #2

2) We have ENSO wet conditions. I highly recommend this govt web site and resource. Unlike finance, the govt goes out of its way to make accurate crop and weather forecasts. In any other industry charges of price fixing and collusion would abound. But thanks to the Dept of Agriculture and related federal agencies all this data is free. You also don't need a Bloomberg terminal to access it.

3) The oversold meats and grains mkts rebounded once people realized the swine flu is aptly misnamed - it is more of a human to human transmission than pig-human. Just how many pigs (of the animal kind) do you see walking the streets of NYC or Chicago anyway? Even if there is a culling this would result in longer term supply destruction.

*Disclosure - I am long wheat, corn, and soybeans.


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