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Commodity Futures Forecast

Timing is everything. Over the past few months, I have attempted to trade typical seasonal patterns based upon the relatively large harvest anticipated for this crop year. While last week's crop report suggests that soybeans will be less plentiful based upon the dry spell at the end of September coupled with irregular weather into the harvest. Given past reliability, I am skeptical over the findings. I can recall when the government lost and found millions of bushels in back-to-back reports that literally had traders sworn off ever approaching the bean market again.

Of course, I have been bucking my own philosophy in trading the short side of the interim period because I have been decisively bullish in the longer run. This is why the Forecast is long the bull spread for 1998. If you couple the recent surge in U.S. beans with predictions for severe droughts in Southern Hemisphere growing regions, you come to a magnificent bullish conclusion.

Current developments remind me of conditions during the early 1970s. In the face of a record U.S. harvest, wheat, corn, soybeans, and other grains began their most famous rise in history. Those price records still stand. El Nino was a catalyst back then as it can be today. However, the phenomenon known as “the Red Tide” and “The Child” was not as well known nor well publicized. This is in contrast with today's daily coverage. Several news hours are featuring El Nino as the season's weather unfolds. This makes the trading public more aware of profit potentials and sets the stage for a speculative frenzy.

Equally important is the vast amount of fund money in today's markets. The size and power of these entities can substantially exaggerate any move. If soybeans are able to extend beyond $7.00 in the midst of harvest, how far can prices climb by the July expiration? Consider that this year's July/November spread widened to almost $2.00! That's a $10,000 per contract premium in a spread!

Other fundamentals contribute to the bullish soybean picture. If, indeed, the Southern Hemisphere suffers from drought, other edible oil crops like palm and coconut may decline. This would pressure soybean oil. Thus, there are threats of related crop failures that compound the possibility of a deficient Southern Hemisphere soybean season. In the meantime, Bridge Data reports that Kansas has no place to put this year's harvest. While Kansas does not constitute the entire country, there is no doubt that this year's corn and sorghum are piling up. The problem is the disproportionate amount of grain within diverse areas. South of Kansas, storage seems to be less of a problem.

I am inclined to view wheat cautiously in light of El Nino. If we have a mild winter and record planting, a glut could develop. Once again, I am torn between the bull spreads and outright short positions. Apparently, most traders anticipate a hefty wheat harvest as indicated by the normal conditions between old and new crop expirations. I believe the pressure should apply to July. Even with a mild winter, we must wait for the new crop. In addition, mild weather does not always imply ideal growing conditions. There are many problems that can occur as a result of too much moisture or too many freeze/thaw cycles.

There has been some discussion of the 10th anniversary of the Crash of 1987. While people talk, the market isn't listening. With prices hovering at near records, there is no immediate indication that a crash will develop between now and Monday. Last week's PPI and this week's CPI offer no reason to panic. Cash flows into mutual funds are overly healthy and traders have overcome the casual comments of Fed Chairman Greenspan.

Thus, the anniversary is likely to come and go with a yawn. The Wall Street Journal carried an article about the change in Fidelity Fund policy to withhold inflow and outflows. The suggestion is that the fund may be readying for a liquidation. If this is the motive, the current environment points to very long term planning. Most of the dissatisfaction with large stock fund managers has resulted from under commitment.

Technically, the broad market continues to creep forward. The slope of the current trendline matches price action before the summer correction. Major global mergers are rising. This does not look like a crash waiting to happen.

Two weeks ago, energy markets touched off inflation sensitivity. However, the move was based upon a possibility rather than reality.

President Clinton's South American agenda includes assistance for oil production. A new cooperative effort to exploit South American potential provides a backdrop for longer term energy trends. My scope points to a universal effort to boost production. From the U.S. to Kazakstan, pumping capacity is being expanded. Will demand keep pace with supply?

I am reminded of the fall season, 1985, when crude plunged from record highs to record lows. The move by Saudi Arabia to control prices proved that capacity is available. Just as DeBeers controls diamonds, OPEC has been able to cooperatively regulate energy prices. The problem is the emergence of non-OPEC capacity. Russia and its producing Republics remain outside of the OPEC convention...for now. Energy is too important an income source to restrict sales.

For the present, weather will dictate the supply situation. The market will need to create panic to support prices...like sending an aircraft carrier into the Persian Gulf

October 16, 1997Philip Gotthelf

Commodity Futures Forecast

7000 Boulevard East, Guttenberg, New Jersey

Financial Commentary

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