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Very difficult to shift gears in changing markets

After two years of a major bull market, almost everyone has learned that it does not pay to sell corn, soybeans or wheat in advance. Unfortunately, what we have learned is it did not pay to use that marketing strategy over the last two years.

Many will conclude that the same strategy will not work in the next two years.

Someone once said that the only thing that we have ever learned from history is that we learn nothing from history. Having been in the commodity business now for 33 years, at the risk of offending readers, most of you probably agree with me that the majority of your neighbors based this year's marketing decisions on what they did wrong or right last year.

Unfortunately, the same marketing strategy rarely works two years in a row. The grain markets have gone through the biggest bull market in history.

One thing that over-exaggerated the bull market is the extreme influence of the commodity index funds which have shoved all commodity prices higher than the fundamentals would have ever justified historically.

Some may conclude that trend will continue and that thus commodity prices will not go down.

I am in the camp, however, that what goes up will come down. The bigger the bull — the bigger the bear. It will happen! The only question is what will be the spark plug that signals the change.

A couple of things could occur that will turn this raging bull into a snarling bear before anyone knows what has happened.

One would be a regulatory change by the Commodity Futures Trading Commission (CFTC) to limit the position size of commodity index funds.

To give you an example, the largest commodity index fund has risen from nothing just a few years ago to $143 billion dollars — 72 percent of which is to be long energy futures and 8.2 percent to be long grain futures.

That is just one fund!

The heat is being turned up in Washington by buyers of commodities. The livestock industry and the food industry, as you might guess, are livid over these rule changes allowing the speculative index funds to go wild. It may take some time, but I do think some legislative changes are on the way.

Another fundamental change that could occur would be a drop in crude oil futures.

Since the majority of these index funds are heavily weighted in oil futures, as oil goes so go the grains since the portfolio has to be balanced at the end of each month.

For example, in the S&P Goldman Sachs fund, if crude oil prices go up, at the end of the month they have to buy more corn, soybeans and wheat in order to maintain the balance in their portfolio. Conversely, if crude oil prices were to drop sharply, then positions in the grain markets would need to be liquidated.

Of course, there is also the possibility that the market may go back to sanity and trade the real fundamentals of supply and demand. Should that occur, I would almost guarantee you the world does not have a shortage of $14 soybeans or $6 corn. We have a shortage of $8 soybeans and $3.50 corn.

If weather conditions are at all reasonable this spring and summer, grain markets have a chance to search for the truth in pricing.

The bottom line: It is very difficult emotionally to make decisions when a long-term bull market switches to a long-term bear. I think the markets are close to being there. It is also difficult to make this change when almost everyone sold too early “last year” and so they will not sell at all this year.

Unfortunately, I think that is going to be a big mistake. On the way up, people compare today's prices to the lows. They're always wanting to sell. On the way down people compare today's prices to the highs — in which case they don't want to sell at all.

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