A few weeks ago I posted a weekly column entitled, “Bullish on anything that grows.” In the column I touted the theory behind “anticipatory and realizing markets.”
I specifically pointed to the grain complex as a perfect example of what may unfold if and when grains embark on a “realizing” rally. As things turned out, the grains have yet to do as I forecast. But the coffee market certainly did.
During the years 2019 through July 2021 coffee prices did not drop below $1.10 a pound or rise much over $1.50 a pound. Prices had been depressed for years, and though most traders and coffee producers were bullish, the market would rally and fail time after time.
The bulls were loading up on the long side of the ledger anticipating sharply higher prices. But year after year the bulls were sorely disappointed as prices remained stuck in a range.
However, in early July, coffee futures were a bit under $1.50 a pound, but in mid-July, the world’s largest coffee producer, Brazil, was hit with an unusual frost. And not since 1994 has Brazil been hit with such a frost.
Here, however, is a rub. Brazil was actually hit with two frosts with another cold front growing with intensity which may produce a third frost in the days ahead.
The unusual frost in Brazil caused coffee futures prices to rally from an early July low of $1.50 a pound to $2.15 a pound by July 26. The coffee market spent years stuck in an “anticipatory” mode until the unexpected frosts blasted Brazil. In a few weeks, coffee embarked on a “realizing” rally with prices up more than 43%.
It does not necessarily take a weather issue or Mother Nature to act to push a market into a “realizing” or “price rationing” rally. Markets with historically tight ending supplies can quickly rise sharply if new demand would suddenly surface.
Here and now, the grain complex with slim supplies of corn, soybeans and spring wheat are perfect candidates to suddenly rise in value to ration existing supplies, or to embark on a “realizing” rally.
Note, however, that the two frosts that did damage to Brazilian coffee and sent prices skyrocketing upward also did damage to their second corn crop. Yes, the unusual frost freeze in Brazil that sent coffee prices screaming north also did damage their corn crop.
From Reuters News: “Brazil government warns of frosts in corn and wheat areas. Freezing temperatures ... will hit crops like corn and wheat in Brazil’s southern and southeastern states, according to a warning issued to farmers by the government’s food supply and statistics agency Conab. In relation to second corn, which represents 70% to 75% of Brazil’s entire production in a given year, Conab predicts crop failure due to water stress followed by frosts in three states, though it did not elaborate.”
Brazil is now importing corn due to the severe drought they experienced this growing season followed by the unusual frosts. As a result, corn prices in Brazil are at an all-time record high, $8.48 a bushel.
In the United States, corn prices are about $5.55 basis new crop. And the inability of Brazil to export something they lack — corn — means the odds are exceptionally high such export business will soon flow to the United States and boost corn prices in this country.
To repeat what I stated in my column, “Bullish on anything that grows,” from a few weeks ago: “According to my old boss, Roy W. Longstreet, in his classic book, ‘Viewpoints of a Commodity Trader,’ published in 1969: ‘When one is faced with a realizing bull market, he has an unusual opportunity. The direction is highly probable and the degree is often large. Sometimes the rise occurs in a relatively short period of time. The risk is usually small.’”
Longstreet went on to say: “Knowledge of the fundamentals of a bull market does not necessarily mean you will be successful in trading. To trade successfully, one needs two things; Knowledge and courage. The knowledge you can learn or buy. Courage cannot be learned or bought. You either have it or you don’t. But you can’t succeed without it.”
Based on razor-thin supplies of corn, soybeans and spring wheat, I can build a case the grain complex is poised to embark on a “realizing” or price rationing rally. As always, only time will tell.
But in a salute to that bold forecast from yours truly, I offer a toast using a cup of coffee while supplies are still available and prices relatively inexpensive. I say, “Here’s to a price rationing rally for the U.S. grain markets! Bottoms up!”