Where Are My Manners:
I was so excited to send through my first post last week that I forgot to pay homage. (Sorry!)
I just want to say thank you to Macro Man for the incredible opportunity to contribute to this blog and hope I can be up to par in terms of insightful market commentary, executable trade ideas, and refreshing levity that has made Macro Man popular.
Additionally, I would like to tip my hat to all the other posters of the blog - we don't need to make Macro Man great again; we need to make Macro Man greater than ever!
Always feel free to comment and give me feedback on my posts - whether it’s the writing or the ideas. I sincerely believe that if I put out an idea that every commenter agrees with (Harry H, that includes you bud) then the idea is probably not so great :). Also feel free to shoot me ideas of what you guys want to hear about as well - if I think I can add value writing, I will try!Food For Thought (Grains Market Primer):
Between daily wood chopping at his desk and scavenging for food in the company pantry, Macro Clown often involves himself in the most unlikely of markets for that of a macro trader: grains and softs.
The convention among those foreign to grains and softs is to group these different groups of assets together. What a faux pas! This irks me as they are very different. Grains (corn, wheat, soybean and related products, oats, rice, etc.) display a lot more autocorrelation – there is a grains beta, if you will. I believe this is the case due to the characteristics of usage substitution and similar growing climates and environment for grains, with short and similar growing cycles of about 5 to 6 months.
Softs (sugar, coffee, cotton, orange juice, cocoa, etc.) also grow in similar climates to each other but there are more intricacies regarding their growing needs. And obviously, something like cotton isn’t exactly a substitute for something like coffee. Most softs also have a much longer growing cycle of multiple years which leads to large long term trends in prices - managed futures funds and CTAs fav.
Grains show similar trends but those trends happen in shorter (6 months to ~1 year) bursts. Currently, there are a couple of factors that are setting up good risk reward (putting yourself in a position to get lucky) for outright directional and spread bets.
Intuitively, as prices of these crops drop, production and marginal producers would be pushed out or forced to switch crops. As a result, supplies get drawn down and any supply shocks become sharply apparent, leading to a spike in prices. Truly, the cure for low prices is lower prices. Vice versa is also true.
Without being a meteorologist or having a crystal ball for supply calamities, Macro Clown can still use fundamentals of a crop to position him in an area of strong risk reward and (with some trusty chart work) find good entry and exit levels.
Long only trade:
The directional view for grains here is that all of the major US grains are in deep value territory. Reviewing the WASDE number that came out today – there has been a buildup of ending stock in the main grains, as prices are at or near 10 year lows reflective of such glut. The market seems vulnerable to potential supply drawdowns or shocks.
What’s the result?
Soon there will be fewer than two million farms in America for the first time since pioneers moved westward after the Louisiana Purchase – Oh boy, this opportunity sounds as juicy of as the leftover BBQ ribs from the broker meeting – supposedly there is a wave of foreclosures coming in the near future as American farmers have accumulated too much debt.
Charts look like it’s trying to make a bottom – a smooth technical analysis operator should be able to patiently find good entries with relatively tight stops. How far grains can run? (Think 7% to 10% stop for 50% to 100% upside in the event of a supply draw down/shock) We’ve had bumper crops the last 3 years where weather in the US has been perfect. Let’s see how long this streak will last.
There are also some relative dynamics at play as well. Soybean has been the best priced crop in the past 5 years-ish. Needless to say, like investors, farmers also chase the market. There has been a land grab in the US Farm Belt in favor for soybeans at the expense of corn and wheat (there's an interesting WSJ article on this). Add to it today’s WASDE print showing a topping out of wheat stock. Sprinkle on the large non-commercial short position in wheat that has started to unwind. You end up with:
Wheat-soybean price ratio. The cure for low price ratios is a lower price ratio? Shrug. Sounds about right.
As an additive to your portfolio, picking up some of these grains or the wheat-soybean basis opportunistically as a speculative lottery ticket looks pretty good here. Stash them for the year, do an anti-rain dance and see if anything good happens.
It’s not hard – Macro Clown stashes food from the pantry at his desk all the time. Speaking of which, where the hell are those pistachios snack packs…
Macro Clown (MC)