T Thheee HHHaacckkeeetttttt MMooonnneeeyyy FFFlllooowww r ...€¦ · TThheee HHHaacckkeeetttttt MMooonnneeeyyy FFFlllooowww r RRReeepppooorrttt January 27th, 2016 Commodity Market

Page 1 of 43 © Copyright 2007- 2016 Hackett Financial Advisors, Inc

TTThhheee HHHaaaccckkkeeetttttt MMMooonnneeeyyy FFFlllooowww RRReeepppooorrrttt January 27th, 2016

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Published By Hackett Financial Advisors, Inc.

Shawn Hackett, President 9259 Equus Circle

Boynton Beach, FL 33472 (888) 535-5525

Email: [email protected] www.HackettAdvisors.com

ISSN 1937-7207

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Growing Financial Success

Contents

Corn Price Analysis

Soybean Complex Price Analysis

Wheat Price Analysis

Cotton Price Analysis

Sugar Price Analysis

Coffee Price Analysis

Lumber Price Analysis

Oats Price Analysis

Orange Juice Price Analysis

Rice Price Analysis

Milk Price Analysis

Livestock

Cocoa Price Analysis

Weekly Agricultural Smart Money Review

CCI-Continuous commodity Index Monthly Chart

The CCI has come down to critical support. This would be a likely place for commodities to begin, in the least, a sizeable bear market rally. A deeply and very long oversold condition argues for a building coiling spring underneath the bear’s claws. Like a catapult, once the string is cut the sling shot affect takes hold. That pressure currently has rarely been any more intense. While overall commodity behavior is important it is not the end all be all too agricultural commodity price trends. For that we must utilize long term

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How much longer can the bear get away with excess behavior? History says not much longer.

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fundamental work, technical work and smart money positioning. On all three fronts, the Grains complex has all the necessary ingredients for a major trend change from bear to bull. All Grain Spot Price Index

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After 2 surplus years, global grains supply/demand are back into balance

Based upon this prolific completing wedge pattern…February 2016 looks to be the month for the bullish turning point




Despite all the bear talk, this past year, despite fantastic El Nino weather and huge U.S. crops, production was not able to overcome record demand. Meaning, last year the worlds entire grain production was 100% consumed with nothing left over. How is that bearish with prices down over 60% from their highs in 2012? What do you think is going to happen to production in the much less favorable La Nina weather pattern over the next 2 years? It is not likely to grow much while demand will continue to set records. This argues for several years of global deficits and a dramatic tightening of global buffer stocks. Rice was the first grain to enter deficits in 2013/2014. Then corn entered a global deficit in 2014/2015. Wheat will enter a global deficit in 2015/2016 and then soybeans will be the last to do so in 2016/2017. The market keeps looking in the rearview mirror and saying look how bearish everything is. That has nothing to do with what prices will do a year from now. A global grain deficit is on the way for 2016 and for 2017. That should provide some upward price risks especially if the U.S. dollar weakens in the first half of this year.

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In the 2007/2008 bull market in grains, wheat was the spark and the leader. In the 2010/2011 bull market, wheat and corn were the leaders. In the 2011/2012 bull market, soybeans were the front runner. In all three instances, rice was the laggard as rice supplies relative to the other grains remained more bearish. The 2016/2017 bull market in grains that I am forecasting will be driven by the rice market given its superior bullish fundamentals relative to the other grains and secondarily by wheat. Every bull market tends to have a change in leadership from the one preceding it. Look for a surge in global rice prices as the catalyst for setting off a grain bull market.




India is entering the Abelian sandpile model or also known as the Bak–Tang–Wiesenfeld model which states: The model is a cellular automaton. In its original formulation, each site on a finite grid has an associated value that corresponds to the slope of the pile. This slope builds up as grains of sand are randomly placed onto the pile, until the slope exceeds a specific threshold value at which time that site collapses transferring sand into the adjacent sites, increasing their slope. Bak, Tang, and Wiesenfeld considered process of successive random placement of sand grains on the grid; each such placement of sand at a particular site may have no effect, or it may cause a cascading reaction that will affect many sites. In the case of agriculture shortages, the same model can be applied as a reciprocal. As grains (no pun intended) of sand (supply) get taken from the base of the sand pile, the steepening of the vertical angularity continues to create a more unstable construct despite very little degradation for the pile itself. Then at some point that last bit of sand/supplies gets removed and the whole system breaks down. It’s called the tipping point. Anyone that spends any length of time looking at the Indian food supply situation can see that we are nearing the tipping point or the point that leads to a cascade of buying into and air pocket of supply. Rice and wheat are the primary grains of sand in the global food sand pile that will likely lead to a recalibration of the value of the remaining inventory. With both India and China in an overall grains supply/demand deficit, one has to wonder the wisdom of the current bearish positioning of market psychology. Over 3 billion people live in countries that have not been able to grow enough grains to feed demand. I am not sure that is a sustainable model without the proper economic incentives domestically in those countries as well as internationally to increase production at the rates required to maintain the peace. While China has been importing to maintain buffer stocks that has come at a cost of depleting non Chinese inventories given the current depressed price environment. India on the other hand has exported their way into a very possible and serious food crisis. The once prolific exporter is now become an importer addict.

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https://en.wikipedia.org/wiki/Cellular_automaton�




A great example of this tipping point concept at work is to look at Australian beef prices. Price more than doubled to all time record in less than one year’s time as the tipping point was reached. No one but a few brave souls saw this coming. I mean no one. Australian Beef Prices

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India is grain deficient for the first time since 2006/2007

Massive drought related herd liquidation in 2013 lead to a supply vacuum tipping point




Anyone that looks at the above imbalances must appreciate that the tipping point or the Abelian sandpile model cascade affect where supply evaporates against demand has a much higher probability of occurring in 2016/2017 than at any other time since the last period like this in 2006/2007. Stay tuned.

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China is grain deficient for the second year in a row and first period since 2011/2012




CORN PRICE ANALYSIS

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The smart money indicator for corn initiated a buy signal 2 weeks ago as a follow on buy signal to the one seen back in November 2015. The technical buy signal which times the beginning of a large move would be a weekly close above the downtrend line.




Summation: Fundamentally corn is very straight forward. La Nina is coming for the next two growing seasons in 2016 and 2017. That means global corn production is in trouble especially in the U.S. A trend line yield in 2016 in U.S. against last years planted acres and U.S. corn supplies will drop by 30% to 40%. That is all you need to know. Obviously if the world is about to come to an end that that won’t matter. But if the world does not end then corn prices should be much higher a year from now. The smart money is betting on a large near term rally with a secondary buy signal to compliment the one generated in November 2015. Any technical weekly break above the downtrend line would likely trigger a sizeable move in corn prices. End user of corn should be protecting upside price risk on a meaningful percentage of the next 2 years worth of needs.

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A weekly break above the downtrend line currently at $3.70 would trigger a technical buy signal that would verify the current smart money buy signal and warrant a large move higher




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First global corn deficit since 2010/2011




SOYBEAN PRICE ANALYSIS

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A smart money buy signal was triggered 2 weeks ago in soybeans. Any weekly close above the downtrend line would initiate a technical buy signal verifying the smart money and likely triggering a large move




Summation: Fundamentally everyone knows that we currently have large soybean supplies globally and that has been the case for a year now. Historically, large near term supplies have been a very bullish contrarian fundamental indicator as it has preceded major bottoms consistently. La Nina is actually worse for soybean production than it is for corn so the prospects for much lower soybean supplies over the next 2 years globally is very high and would easily eradicate the current large supplies with ease. A 5% reduction below trend line yields in the U.S. would have U.S. ending stocks fall by 40%. Also current South American weather has not been ideal for soybeans as areas of too much rain and others with not enough have occurred in a large enough geographical area to end any hopes for a top end crop. The crop should be ok but not great and that means in the minds of the market supplies will be less than they thought just a few months ago. Smart money is betting on a large near term price move with a buy signal triggered 2 weeks ago. Any weekly break above the down trend line would trigger a technical buy signal. As you can see we closed last week exactly on the downtrend resistance line. So one should be on the lookout for a possible break out in soybean prices as early as this week. Long term hedgers should be protecting upside risks for the next 2 years.

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A weekly break above the downtrend line currently at $8.80 would trigger a technical buy signal that would verify the current smart money buy signal and set off a large move higher

Major smart money buy signal in soybeans continues




CBOT WHEAT PRICE ANALYSIS

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Major smart money buy signal in wheat continues




Summation: Wheat is very straight forward. Global wheat inventories have peaked and the first global deficit is on the docket for 2016 since the one that occurred in 2011/2012. India is nearing a major wheat supply scarcity problem and they have become a net importer of wheat. What happens in India will not stay in India.

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If India experiences another poor monsoon season in 2016 then we can expect wheat imports to reach 2006/2007 levels.




COTTON PRICE

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Massive smart money sell signal in cotton continues and support has broken




Summation: Cotton is very similar to orange juice as it seems it is a race to the bottom with demand and production falling. Such markets take a long time to erode inventories and become a singular supply driven price discovery mechanism instead of having a demand side component. I see very little that will change this until the summer where La Nina style adversity may cause a big move higher in cotton prices. Until then, the path of least resistance is to the downside. Like orange juice there are times that production is falling faster and there are other times that demand is. Right now demand has stabilized while production is falling rapidly. This should allow for an upward price move over the summer time. For now there is not much to do in this market.

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A move down to the .60 area seems likely if not lower




COCOA PRICE ANALYSIS

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Smart money bought aggressively into the recent decline




Summation: The recent crash suggests that the cocoa bubble may have finally popped. I am expecting a series of surplus years coming up over the next few years and this suggests that prices will likely need to fall back down to long term support near $2000 to provide the correct drivers for a bullish turn in fundamentals. For now smart money has bought in aggressively on this decline and prices are nearing intermediate support. A bear market rally seems reasonable. That will offer another fantastic shorting opportunity.

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SUGAR PRICE ANALYSIS

A break of $.14 support area would open the selling floodgates.

The smart money sell remains in affect suggesting that a break $.14 to be very likely in the near future.




Summation: The bottom line with sugar is that Brazil come March 2016 will be cutting a monster sugar crop that will see an increased percentage go to making refined sugar rather than for ethanol. It has been the “garden of Eden” in Brazilian sugar areas and that means the very shorter oriented, China driven; Brazilian ethanol binge that caused a fleeting supply issue will end abruptly. February has been known as the widow maker for bulls as so many sugar tops have occurred in this month. I am expecting prices to give back at least 50% of the move and possible 75% of it. With a massive smart money sell signal in place and a weakening technical picture, sugar is a great short entry on a break of the $.14 area. The next decent buying opportunity could be in May 2016 ahead of the India monsoon season but until then the bears should have their way with the sugar market.

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Coffee Price Analysis

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A multi pronged series of smart money buy signals increases the odds of a near term rally.




Summation: Coffee is straight forward…Either the current numbers are correct and Brazil has completely front-end loaded supplies of the 2015 crop and above ground stocks or the numbers are wrong and they have not. The USDA and Conab are both very biased but consistently biased over many decades. I do not believe it is likely that they have diverged from this all of a sudden so the numbers they are suggesting, after correcting for their biases, should still be a good number. That would leave a supply vacuum from now until supplies from the 2016 harvest become available in Brazil in June/July. That would argue for a large up move to begin now and peak in the spring time. A multiple smart money buy signal supports this notion as does collapsing ICE certified stocks. A powerful technical pattern has developed that would trigger a buy signal on a close above $1.20.

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March Coffee Continuous- A move above $1.20 should set off a large move higher.




When coffee moves it is fast and furious so this could be a very lucrative long if given the correct technical signal. The only missing piece of the puzzle is that as of yet Brazilian cash differentials are not yet showing acute tightness. If Brazil has completely destocked then a 55 million bag 2016 crop will do no more than just cover demand. There is no room for another weather problem in Brazil. Bull futures spreads have started to improve also suggesting tightness in early development. A quick move to the $1.40-$1.50 area would not be surprise to see.

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Lumber Price Analysis

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Major smart money sell signal and technical sell signal suggest a retest of the lows is in process.




Summation: Lumber prices tend to rise and fall based upon U.S. housing activity 12 months ahead. I am not very bullish new home construction for the first half of 2017 and hence lumber prices are likely going to remain weak. Only strong import demand from China can cause a different outcome. While I do believe that is likely, I do not expect that it would be enough to propel prices higher until low U.S. prices force lumber supply out of the system. My best guess is that will happen by the spring time. That may be a more opportune time to look for a yearly low. For now this market is to be avoided.

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Oats Price Analysis

Summation: The oats market continues to be on path of extinction. Open interest continues to dry up as global demand for oats remains stagnant do down. Also, the transportation snafu in Canada from a few years back where oats futures skyrocketed against crashing local Canadian prices causing an epic commercial hedging squeeze has also convinced those that were using futures to no longer use that methodology. Oats is becoming a cottage specialty industry that will be managed with direct cash contracts. So it is not a question of if but when this delisting of futures will occur. As such this market is to be avoided.

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A lack of any smart money buy signal on the recent oats decline does not bode well for a large rally in prices




Orange Juice Price Analysis

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Renewed buying on this decline in OJ prices suggests a near term rally may take hold.




Summation: OJ is a market that has been racing to the bottom of a futures market extinction event similar to the comments I made about the oats market. Unless U.S. demand and European demand stabilize quickly this is all but a foregone conclusion. It appears that in 5 to 10 years time there will be very little if any orange juice production occurring in the state of Florida. Even Brazil will need to contract production significantly to avoid an oversupply. Given crashing open interest and crashing demand this market is to be avoided.

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With support holding and smart money buying aggressively the odds favor a short term rally




Rice Price Analysis

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A renewed smart money buy signal indicates the likelihood for that the next bull market leg in rice prices is soon to begin




Summation: I have gone over the escalating bullish supply/demand mismatch that has brought global rice buffer stocks down almost 20% over the last 3 years with Indian rice buffer stocks falling 50%. I am going to devote a special report on rice in the not too distant future because I do believe that rice will lead the grain bull market that I am expecting to begin very shortly. For the moment, the two most important prices to watch are Thailand rice prices and India rice prices. When India rice prices start to take off that will be the signal that they have reached the tipping point and that rice exports will be a thing of the past. When Thailand rice prices start to take off it will tell you that they are done with expunging there rice hoarded supplies and are now in a position to back away from aggressive sales. This will also means that they will only be able to export the difference between production and domestic consumption which would only allow them to export 5 to 6 mmt down from 10mmt to 12 mmt. All the weather models for India are showing an uneven monsoon season with the epicenter of weather problems centered in key rice growing states of India. Should such a forecast begin to verify, India would almost assuredly halt rice exports to save themselves from insufficient domestic rice supplies.

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Holding support against and new smart money buy signal bodes well for a resumption of the bull market in rice prices.




The models favor the right graph which would encompass most of the key rice growing areas. Even the left graph would affect a good portion of the main rice growing areas. Such an outcome would not good news for India’s food supply chain.

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Indian and Thailand rice prices starting to show some life.




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This area is at greatest risk for unfavorable monsoon season in 2016




Milk Price Analysis Class III

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Class III milk nearing a major smart money buy signal




Summation: My forecast has been and continues to be that spot milk prices will make a bottom in the January 2016 to February 2016 timeframe. Thus far I do not see evidence that this will be a V-bottom like last year but see more of a U-bottom that will build momentum in the back half of the year. Slowly but surely the negative price affects on production and on herd size are beginning to take hold. The only place where milk production is meaningfully higher than last year is in Europe due to a one off affect from the removal of the quota system and currency benefits of the crashing Euro. That temporary levitation of production has peaked and I am expecting production gains yoy to decline markedly as the season progresses. So in the end production is bullishly oriented and now we need to see china mean revert milk powder demand from the current trough. Once they do then milk will begin to show acute tightness just as grain prices start to rise meaningfully maintaining pressure on production. This all sets up for much higher prices in the back half of the year assuming good weather globally. ^back to top^

A move above $14 spot prices would be a major technical buy signal.




La Nina does tend to produce a lot of heat in the U.S. over the summer so that could certainly provide for some milk per cow deficiencies and corresponding price spikes. The current set up is especially bullish for milk powder prices. End users should be protecting long term upside risks.

The current dotted line is my forecast for Chinese WMP imports. Anecdotal evidence supports this and if verified would provide a much needed bullish pillar




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The 2008/2009 notwithstanding, when the march/sep bull spread reached the box has been highly correlated with major low in spot milk prices. We have entered the box as we speak.




Live Stock Complex

Summation: The long term fundamental picture for beef is very bearish right now. U.S. supplies are finally starting to grow and if feed prices rise as much as I am forecasting, then forced herd liquidation later in the year will further over supply the market. A slowing global economy will not support rapid demand growth either so where we are at this point is that near term beef supplies are still tight and seasonal U.S. demand should provide for a bear market bounce into the spring time. Thereafter beef prices are likely to crash and burn into a major low in 2017.Shorting this bear market bounce should be quite lucrative.

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Smart money continues to support a further rally to the 140 area




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Improved supply outlook is a long term bearish headwind for cattle prices.




Lean Hogs

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The smart money positioning still supports further upside in Lean Hogs




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Looks like hogs can rise to the 65 to 70 area over the near term.




Summation: A wave of replacement demand for pork over beef has put a bid into the hog market in a classic oversold bear market bounce. While that rally seems to still have legs to go higher, there is a limit. U.S. supplies will remain ample and current weak cash basis against futures does not bode well for a sustainable move higher. Similar to beef, as feed prices take off later this year a similar wave of herd liquidation will put extreme pressure on the hog market. That post herd liquidation low would be the harbinger for a final bear market low in 2017. In the meantime, shorting this bear market bounce should prove quite lucrative. ^back to top^

Weak cash basis does not bode well for the current rally to last much longer.




If you have any questions about any of the content in this report, please call me at (888) 535-5525 or e-mail me at [email protected] . Thank you for reading and I hope your future investment decisions turn out to be prosperous ones.

Best Regards,

Shawn Hackett, President ^back to top^

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T Thheee HHHaacckkeeetttttt MMooonnneeeyyy FFFlllooowww r ...€¦ · TThheee HHHaacckkeeetttttt MMooonnneeeyyy FFFlllooowww r RRReeepppooorrttt January 27th, 2016 Commodity Market