IS FOLLOWING THE HERD A SMART THING IN COMMODITY TRADING?

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Introduction

Hi everyone, hope everyone is safe as in some states and countries, COVID-19 is still spreading. This is making for some volatile markets once again in the stock market, crude oil, and the US dollar.

From a weather standpoint, there are 4 markets in particular that I continue to be fairly confident in. Unfortunately, so are a lot of spec traders and hedge funds. I would prefer to see a “major weather event” in which all the shorts run for the hills. Then we can jump on this bandwagon, catching a major move.

In the crude oil market, I felt very strongly a month ago that prices would have spiked. Unfortunately, this was not a weather-related trade, so I shied away from recommending some sort of conservative option play when oil actually dipped below $0. That was incredible. Then, a week ago on the massive 120% rally in crude to the top of the gap, my bias was to short crude near $40. One could read between the lines in my recent reports about this. The reason for the weakness in crude oil is still the oversupply and the fake-out rally on a tropical storm. To me, that storm rally about 10 days ago was total nonsense.

Anyway, I am still falling into the “herd mentality” in these three particular markets that have a heavy short position (bearish coffee, bearish corn, and bearish natural gas). All three have quite a bit of weather in them. I am also still bearish wheat on huge global supplies and great weather for the wheat crops in Australia, Canada, and Europe, with the summer harvest just around the corner.

Reports This Week Which Will Impact Markets

Federal Reserve Chairman Jerome Powell is due to testify to Congress amid concerns over a possible resurgence of Covid-19. On Tuesday, U.S. retail sales data for May will be watched for indications on the strength of the reopening rebound. Investors are waiting to see if the recent bounce in value stocks can be sustained. Across the pond, the Bank of England is expected to further expand its stimulus program after a report showing that the economy contracted by more than 20% in April. It’s also set to be a busy week in the European Union, with a fresh round of Brexit talks and a summit to discuss its pandemic recovery fund proposal.

The latest initial jobless claims report will be released on Thursday. Jobless claims totaled 1.5m last week, marking the 10th consecutive weekly decline as hiring slowly returns.

Some of these reports will affect commodities, but more so, the stock market. I think the odds of a major 10-15% rally in the market over the next few months is quite suspect, given unemployment and too many small spec longs, but back to the weather.

The Recent Mini-Bull Market In These Two Agricultural Commodities

The two agricultural commodities showing any life are cotton and soybeans. Soybeans tend to have a seasonal long this time of the year. Hence, they have prevented corn prices from falling in the last couple of weeks. However, again, the weather is bearish for corn. Without a summer drought, I think the odds are 60% or more for Dec. prices to test $3.00 later in July. The thing we have to watch that could change all of this is the developing La Nina and if the PDO goes negative and ocean temps cool west of California. Then the ideal crop situation could change. But right now, I do not see that happening for at least 2 weeks or more.

Soybean prices on a seasonal basis.
Soybean prices seasonally.

Cotton prices have rebounded following the outside markets and crude oil. There is dryness developing in west Texas that may garner some interest, but I have not looked at this market much at all, as I have been very focused on grains, coffee, and natural gas. Perhaps I will get to cotton later this next week and next.

Preciptation last month.

Notice the dryness for West Texas cotton. This may be inspired by the developing weak La Nina. I will look more into this in the next week or so. The problem right now is that cotton prices have already rallied 20% off of its April low, on other non-weather factors. Recommending a buy just on the Texas dryness may be premature at these prices.

Corn and Wheat and 2021

Also notice the general ample, great soil moisture across the Midwest grain belt. Without extreme heat, there is little chance that corn will see a major rally any time soon. I wish there was a long position, but there of course is a huge net spec short position. Otherwise, it would be a “piece of cake” that corn prices would soon fall out bed. For now, I would maintain a short Dec. corn position, even though we did not recommend buying beans on seasonal and other factors.

I have had quite a few farmers in the Midwest and around the world ask me what they should do with forward contracting or hedging their crop. I think the odds would favor potential crop yield reductions, next year, in 2021. While farmers may want to hedge some corn and wheat given bearish global weather, prices are pretty darn cheap right now. I think the odds in 2021 of a rally in grains is much more likely. $3.00 corn and $4.50 wheat is not out of the question this summer or fall, but the potential a year from now for higher prices.

Big Ice Storm And Severe Weather Hit Alberta, Canada

This is not a market factor but is of interest, as we have a few farmers in western Canada. I look for a lot more rain in western Canada over the next week or so. While there may be some areas of flooding, etc., for the most part this is beneficial for early rapeseed and spring wheat.

Calgary Canada saw hail and heavy rain.

Still Bearish NY Coffee and Neutral To Friendly Robusta London Coffee on Vietnam Drought

Coffee prices made multiple-month lows last week brought on by global supplies at six-year highs and a huge on-cycle Brazil crop hitting the market. I mentioned several weeks ago in the 105 level basis July coffee to exit any short term long position and short puts (conservative longs) before prices broke some $3.000 a contract the last two weeks.

The drought in Vietnam (#1 producer of cheaper, instant, Robusta type coffee) has gotten worse. However, Robusta has been dragged down again by the outside markets and the free-fall in NYC higher quality Arabica coffee.

In hindsight, instead of selling the September coffee $1.20 call at around 320-350 points ($1,000/contract) and being long 3 July Robusta coffee futures against it, I probably should have advised just selling NY futures outright. In other words, if coffee does fall to 90 cents, that would be some $4,000/contract profit vs the maximum $1,000 short the call. It may be too late to be selling NY coffee futures in the hole right now, so the short call was the conservative play. This collapse would potentially wipe out any potential profits in Robusta coffee. However, it is articles like this that make me fairly confident that long Robust coffee is a good hedge on breaks vs. Arabica.

Vietnam is still experiencing drought that may impact its coffee crop.

Robusta coffee may not react to the drought until the harvest is closer by the fall. Robusta coffee is often not like the summertime corn and soybean market, which often reacts to short term weather events and crop affairs.

Energy Markets In A Tail-Spin Again

I felt the rally in crude oil was overdone two weeks ago and sent this chart. The world is still awash in this stuff. With COVID-19 cases increasing again, $40 prices were not really justified. The rally a couple of weeks ago was also partly attributed to Tropical Storm Cristobal in the Gulf, but I really think that was not a major factor.

Crude oil filling a price gap.

Natural gas weather remains bearish, with no extended heat. It is tempting to recommend a buy at such cheap prices but I am waiting to see if La Nina forms and we can see the potential for an active hurricane season and hot, late summer. I have more confidence that next winter may be cold, but we cannot recommend trading on this, presently.

A Little Nature In the Midst of Such Violence, Stress And Covid-19

Maybe this video below will make us all really appreciate nature more and to look at the bright side.

Have a good week.

Jim

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