HardAssetsInvestor

Written by Brad Zigler  |

April 12, 2010

Changes Coming In The Commodity Space

Details

There's an old adage that says it's darkest just before the dawn. That nostrum could be extended to the commodities markets.

Take grains, for example. Bulls have been battered this year. Corn's off more than 16 percent. Wheat's down 13 percent and soybeans have slumped 9 percent.

The last USDA grains stocks report didn't raise bulls' spirits. If planting progresses normally over the next couple of months, a carryout of more than 2 billion bushels is likely. If that's not pre-dawn darkness, I don't know what is. A lot of bearish news is built into corn's price now.

A huge carryout—more than 500 million bushels—is also projected for soybeans. And wheat? Well, don't get me started on wheat. While the supply overhang is weighing on prices, global production has yet to be cut back. But that time is coming.

That enough darkness for you? It is for me. All this tells me a bottom ought to be expected in the grains. Maybe not tomorrow, but soon.

The opposite case can be made for livestock. For hogs, lower feed costs (see above), coupled with low head counts, have boosted profitability. Producers, feeling more confident, are likely to expand their herds. Parabolic price increases, if sustained, could curtail consumer demand.

The cattle market looks toppy, too. Retail prices are high enough to hurt demand if they persist at current levels. At the very least, cattle ranchers are being tempted to increase per-head weights to grab higher margins while they last.

Again, livestock prices may not drop immediately, but experience says that the more dramatic the upswing, the faster the subsequent downturn.

The upshot? Look for opportunities in the iPath Dow Jones Grains-UBS Grains Subindex Total Return ETN (NYSE Arca: JJG) and the iPath Dow Jones-UBS Livestock Subindex Total Return ETN (NYSE Arca: COW). Better yet, watch this space. We'll let you know when we see the trigger's been pulled.