While my crystal ball is in the shop, and I am unable to tell you exactly what will happen in the co...
How Anyone Can Play Commodities
01/13/2012 9:45 am EST
Prices of agricultural commodities like corn and wheat are on the move, says John Person, citing a few ways to profit that range from more complex spread trades to simple stock purchases.
Let’s talk to John Person and see how we get involved. John, commodities are a hot topic; how can people start playing the market?
First off, when you say commodities, most people have a fear of trading commodities because they don’t want bushels of corn dumped on their front yard.
You don’t have to take delivery though.
Exactly. The leverage can be an issue that people aren’t familiar with.
I think if you look at the supply/demand seasonality functions, typically, we form what we call "harvest lows," which come between November and December.
From there, business slows down during the holidays, and then after the first of the year, that’s when we start to see our export business pick up. Demand increases, and there’s that time period where supplies are starting to dwindle from the US harvest to when we see the South American harvest come onboard.
So there’s an opportunity in that six-month window that we see prices typically increase.
A couple of ideas that I like: I’m looking to be more of a buyer on dips in the corn markets still. As we get into late December and early January, there’s a spread trade opportunity I’m very interested in, and that is buying wheat and selling corn.
Generally, wheat prices are trading above the price of corn, but this year, corn prices are above the price of wheat. As we get through the first of the year and this inventory that’s been building, I think we whittle down the wheat supply, and we’re going to start to see that spread start to go back from negative to positive.
In other words, buying wheat should outperform the price of corn. Even though I believe corn prices will go higher, I think we’re going to see wheat outperform corn.
So there’s two strategies there that I would look at.
Going further into 2012, and I know you’re not a weatherman, but all of the corn and wheat plantings have to do with climate change. Do you see any type of seasonality plays going into spring?
Well, you know, I was always taught that you ride the trend until the trend ends. The trend right now in weather patterns is that it’s abnormal (and) crazy. I think that we’re going to continue to see that.
This spring—and I’m not sure what the Farmer’s Almanac is suggesting—but if we do get your typical at least scare that it’s a cold, wet spring where farmers can’t plant on time, that’s certainly something that’s going to add to the bullishness of price escalating higher.
For those that are afraid of the leverage of commodities, is there some sort of stock plays that are involved for the agricultural?
Very good question. In fact, we like to do a comparative analysis, and we take a look at seasonal analysis and we take a look at stocks. How do they perform in relationship to the underlying commodity?
You’ll find that we typically see the fertilizer sector moves in correspondence, cycles with the prices of the grains.
Typically, we see the price peak out in the fertilizer sector. We’ll take a stock like Potash (POT); typically, we see that stock peak out in late June/early July, and it generally tends to see bottoms coming into late November and early December.
I’d be looking at any pullbacks, and if we do see a pullback into the $42 to $38 range in Potash, I’m looking to be a buyer in that area.
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