March 1, 2019
Takes My Breath Away
An old saw that came into vogue in the years 2000 to 2012 was, as China goes, so go commodities. The reason it was coined was clear. In 1998 commodity values fell to a 56 year low but bottomed out in the years 2000 to 2002. In 2001, China became a member of the World Trade Organization and quickly embarked on a buying binge. Consequently, commodities per se were in bull market for more than a decade with the CRB Index hitting an all-time high in 2011. And thus, that old saw came into being.
This week the big news and I mean big is when China pledged to buy $1.2 trillion, yes, trillion worth of U.S ag-commodities such as grains and meats in the coming years. Of course, pledging to buy is not nearly as good or bullish as actually doing so. Still, the pledge pushed the CRB Index to a new, 3 month high and boosted the stock market as well. Commodities as well as stocks are giddy over the bullish demand news coming from China.
When China became a member of the World Trade Organization in 2001, they began to buy the devil out of US commodities and by 2012, the total value peaked out a tad over $25 billion. But now, China has pledged to buy $30 billion on top of what they bought a few years ago with a total in excess of $50 billion, annually. Never before in the history of US agricultural has such a massive amount of new found demand surfaced for grains, livestock.
The value of all US exports sold to China peaked at $25 billion in 2012 but fell to a 6 year low in 2006 due to a slow-down of buying. During that time frame, the CRB Index kept moving south until a record low was carved out in early 2016 before trading sidewise the past 2 years.
Some in agricultural argue that the U.S. cannot logistically meet the demand from China if they honor their pledge. They argue US agricultural cannot produce that much grain and livestock. They may be right. Or, wrong. Regardless, such massive demand would be unprecedented from a historical viewpoint and quite bullish.
In, Haunted By Markets in a chapter entitled, Stick A Fork In Deflation that I penned on January 10, 2000. Here is the opening paragraph. The Era of Deflation for commodity values that unfolded three long years ago due to the Asian Crisis has ended. It is a thing of the past. It is history. The coming year and those that follow will give birth to the most bull markets for commodity futures seen in quite a while. Possibly since the 1970s!
I went on to write. That is the primary message I have been imparting in this column for the past month. In particular over the past few weeks. As a matter of fact, I am so bullish that to my brokerage clients I snort, buy the breaks, but dont be short!
Certainly, it does not mean I am right. I could be wrong. The coming year and those that follow may be just as bearish and just as ugly as the past three years. Still, my long-term work strongly suggests that few commodity markets will move lower in value from current levels. Then again, only with hindsight will we know for certain whether I am wrong or right about what lies ahead. But Im betting that bull markets lie ahead.
As it turned out, my column was exceptionally prophetic to say the least. In the 12 years after composing that column commodity values more than doubled in value. Some tripled. But after peaking, total export values to China declined for the next 6 years. Nonetheless, the promise by China to buy an unprecedented amount of U.S. ag-products suggests loudly we could enter another a period of rising and sustainable prices similar to what was witnessed in the years 2000 to 2012.
I favor greatly that old saw, As China goes, so go U.S. commodities because it proved prophetic in 2000 to 2012. Since history has a way of repeating itself, I fully expect the commodity markets to be on the cusp of a very bullish period once again. After all, China is pledging to buy $50 billion a year when in the past the most they ever bought from the US was a bit over $25 billion and that was in just one single year.
Moving forward all I can think to advise is, dont be left behind! A new and bullish era for agricultural is poised to unfold as it did in 2000 to 2011. The dollar amount of US ag-products China has pledged to buy takes my breath away.
And to learn some of the history of markets in the years 2000 to 2002 when they bottomed to 2011 when the topped out check out, Haunted By Markets at commodityinsite.com. Check it out!
Yesterday, commodities per se did well. The CRB Index rose 81 points and the Goldman Sachs commodity index posted a gain of 226 points. The most impressive market, in my view, was Chicago and KC wheat that closed 22 to 24 cents higher while experiencing the widest one-day trading range on the upside since last August. By any measure, commodities did well and wheat especially impressive.
This morning, on the other hand, grains are just about the only commodity markets in the red. But the day is young and subject to change. Moving forward and in consideration of yesterday, grains and most all other commodity markets should be well supported on weakness.
Drop me a line at email@example.com if I can of help.
The time is 7:11 a.m. Chicago.
PS For the past week I have been suggesting to probe the short side of cattle and yesterday that strategy did well. This morning, I am suggesting something a bit different. Let me hear from you!
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