Monday, March 17, 2014

No Lack of Opportunity in Ag Markets says M6 Capital

by Attain Capital

With planting season right around the corner, and spring just days away, it’s just about the time when investors looking for diversification turn their sights towards the Ag Markets. Lucky for us, M6 Capital recently published their opinion for what’s in store for the year to come, and the first tidbit is that speculators don’t appear to be waiting for spring to officially begin to make their decisions on where prices are headed…

“The Combined Speculative Position has increased…nearly 400,000 contracts [to net long] in the last 4 weeks, one of the largest 4 week speculative buying campaigns ever.”

Combined Spec Position(Disclaimer: Past performance is not necessarily indicative of future results)

While the early spike (in Corn and Wheat) has been mainly be attributed to tensions in Ukraine, M6 believes it isn’t Europe, but South America & U.S. conditions that might change the course of grain trends moving forward.

“M6 is of the opinion that Brazil and Argentina will return to selling and exporting large quantities of corn this summer. For Argentina, the largest single source of government revenue is grain export taxes. With a 24 million tonne crop and domestic use of only 8 million tonnes, there will be plenty to export. Their government is expected to issue export licenses shortly so exports can begin. At M6 Capital, we believe U.S. old crop (Sep 1) stocks will be a plentiful 1.5 billion bushels and new crop supplies (beginning stocks + new crop production) will be a record, large 15.9 billion bushels. Thus, we believe prices will eventually trade lower than current levels, and potentially much lower (Figure 2).”

CornChart Courtesy: M6 Capital
(Disclaimer: Past performance is not necessarily indicative of future results)

Much like corn, M6 predicts a plentiful crop of soybeans. Even though there’s an expected tight supply in the U.S., South America will pick up the slack, while China (the world’s largest soybean importer), might start taking in less. Even with a slimmer than usual supply coming from the U.S., it still represents a good portion of the estimated soybean supply when harvest time comes.

SoybeansChart Courtesy: M6 Capital
(Disclaimer: Past performance is not necessarily indicative of future results)

There is a caveat to this supply however. M6 believes that until investors and speculators gain confidence in the U.S. supply, pricing will remain strong.

How can we talk about Ag markets without mentioning Livestock, especially the Hog epidemic, sending Lean Hogs to all time highs. Under the assumption that farmers are unable to control the deadly virus that has thus far killed millions of young hogs, supply could hit its low from May-July.

PorkChart Courtesy: M6 Capital
(Disclaimer: Past performance is not necessarily indicative of future results)

Put all that together, and there’s no shortage of subplots in the Ag markets for the coming year – with viruses and geo-political tensions adding to the usual weather driven markets. After struggling for the first two months of the year, Ag Traders sure could use some good calls to get back on track for the year – but only time will tell how well the forecasts and analysis match up with price action moving forward.

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