It was Russian buying that first started the big bull market. Now it could well be that the lack of Russian exports in wheat is helping fuel the fire for this bull market. While the rest of the world economy is in disarray, agriculture is moving on.
There is no doubt that we are witnessing increased worldwide demand for wheat, corn, soybeans and cotton. All three have experienced substantial bull markets since June. The key question now — how long will it last?
Supply vs. demand
To begin with, I will not argue that the beginning phases of this market were demand-fueled. But as harvest progress is taking place in the Midwest and corn yields are substantially below expectations, the latter stage of this bull market has turned into a supply-driven and not a demand-driven bull market. With that said, keep in mind that supply-driven bull markets behave entirely differently than a demand-driven market.
To be specific, supply-driven bull markets driven by yield losses will experience a market peak during or right after harvest. When the news of the yield loss is most obvious and everyone knows it, that’s when a blow off top occurs. This is a market that should likely see a top before the end of October.
What could be negative?
The real negative in the market now is overspeculation by outside investors. As I write this, the majority of the long position in futures and options and all the grains and cotton is held by commodity funds — and mostly by index funds (long only funds). The biggest part of the portfolio of index funds is in crude oil — so as crude oil goes, so goes a lot of the other commodity markets. If crude oil shifts into a substantial bear market, then selling pressure will enter all of the agricultural markets. On top of that, the world continues in an economic recession like none we have ever witnessed since the Great Depression.
The bottom line: High prices at harvest time have historically been the highest prices of the marketing season. Farmers throughout the country now have the opportunity to lock in one of the most profitable years in history whether you are raising corn, cotton, wheat or soybeans. Don’t let these opportunities pass you by.