World grains markets could be set to hit lows within months, according to David Hightower, president of The Hightower Report. He told delegates the Global Grain Conference in Geneva, Switzerland in November that the bearish market has dissipated. China is growing, supply is getting tighter and ethanol could be set to play more of a role after a period in the background, and the U.S. is leading the world out of recession. Any supply side shock could have a dramatic effect.
“I think the markets as we sit here today are in the early throes of making what could be a historic low,” he said, stressing that he was referring to modern history. “The economy has underperformed. Production was large, but not as large as was feared. The potential for a multi-year bear market has dissipated.”
He cited potential issues around the oil market, currencies and China’s growth. Anyone of those particular items on any given day could be the primary driving force in the market, he said.
“I am a classic fundament analyst at heart,” Hightower said. “You have to look at how much is on the ground, how much is being consumed and you have to understand the patterns that are unfolding. Supply dominates until supply no longer dominates. The markets will focus on that extra supply.
“I would predict that low point and that fulcrum point to perhaps take place between now and the end of the year or maybe at the latest by the end of January. We are getting near the end of a correction in commodities. The bottoms are coming. If you look at January 2015 and January 2016, you are going to find a little bit tighter supply.”
Not concerned about China
He played down concerns over the Chinese economy. “If you are going to worry about something, you should worry about the U.S.,” he said. “It has a huge debt. The top half of the consumers are doing very well in China.”
China’s economy still relies on selling manufactured goods to the U.S. “They are a mirror image of the U.S. economy,” he said.
There is uncertainty around El Niño. “This is a supply side problem that has not yet been factored in,” he said. “The Pacific Oscillator is still very strong. Precipitation is starting to decline in those areas which should decline in the early stages of an El Niño.”
The U.S. and most central banks have no ability to control inflation, he said.
“When inflation starts to come around, it shows you that growth is taking place. The dollar is strong which is negative to physical commodities,” he said. “It keeps the heavy supply in the U.S. The U.S. is the head car in the train. It’s now starting to go up the hill. The U.S. will lead us out of this. The dollar is going to make the pressure on commodities acute in the next two months.”
He noted a sharp increase in Chinese spending to tackle pollution. “When I look at the clean air problem, the quickest way to remedy that in India and China is to put ethanol into the equation,” he said. “India and China will either make the ethanol or they will purchase the ethanol.
“China has more money than people think. India has the strongest growing economy in the world. They are going to be the people who will be stepping up to buy.”
It’s not surprising the U.S. is producing a lot more gasoline, he said. “We don’t have the products that are going to meet this ever-growing global demand. We even exported ethanol to the United Arab Emirates and Brazil. Look at world vehicle sales. It continues to outperform. A large percentage of those people last year were riding a bicycle, walking, riding a moped, little three-wheeled tuktuks. Now we’re seeing SUVs bought in China. Total global (oil) exploration and development costs went down by 21%. The beginning of a major bottom is in place in the oil market.”
The most important influence on corn and items to make ethanol is the price of oil, he said.
“We have this major bearish psychology, but if I look at production and stocks to use, many times we’re almost matched,” he said.
He gave an example of the Chinese corn market. “For four or five months of this year, the trade was pointing to record stocks and yet price was at a record high. Now what has happened is that the crop has come down, maybe 21 million tonnes.”
That was out-of-condition corn which could be used for ethanol, he said. “China needs the corn,” he said. “If they have 21 million tonnes less than we anticipated, that’s half of what the U.S. exports in a year. It’s twice what Ukraine exports.”
He advised against trading on the basis of China’s GDP. “First of all, that number is not very accurate,” he said.
China would continue to satisfy basic demand despite what happened to GDP growth. “The government will subsidize production to keep the price of pork down. The only way the Chinese government loses control of the country is not from the U.S. or a military battle. It’s if they can’t feed and keep happy this billion and a quarter people that have become used to a better diet.
“What comes in is that they are now using one-third of the U.S. crop for ethanol. When you look at the last two months, this has further exploded.”
Ethanol is starting to be shipped to the world, he said. “There is going to be more consumption of ethanol than you will expect to see at the end of this year. If ethanol stocks in the United States continue to fall, you are going to see the restimulation, the add-on and the efficiency come back and ethanol margins will expand dramatically. We’ve made the trough in the global economy, and we’re going to get better,” he said
Hightower reminded the audience that corn can be volatile. “You can’t rule out $4, $5.20 because of what has happened. Call options are cheap. Even put options are cheap because the market doesn’t expect volatility. I think they are wrong.”
He foresaw a less bullish scenario for soybeans, saying that meal is the most oversupplied sector. “We’re crushing these beans because we have high oil demand,” he said. “Soybeans will outdistance the corn market if there is a supply shock. We’re going from a completely bearish assumption in beans. The magnitude of change of psychology in the bean market will be greater if there’s a problem with production.”
He commented on the strongest El Niño since 1950. “If palm oil exports slip a little bit over the next year due to Indonesia and Malaysia, we’re going to need 4.7 million tonnes of other vegetable oil to make up demand,” he said. “That’s very difficult to accomplish.”
He said if El Niño hits it would not be surprising for soybean oil to double in price over the next 12 to 18 months.
As for the trajectory of price in wheat, he said it would fit in somewhere between corn and soybeans. He explained that a wheat price jump can be caused by a shortage of one type. “We have to be careful that of all those different kinds of wheat, not one of them has a supply problem.”
Confident in a rebound
“I believe the markets,” Hightower said. “Now we have less supply and the economy’s getting better, we don’t deserve to go back to those levels that were trading two or three years ago. World demand is not going to stop. El Niño could be like a freight train. It could drive all commodities higher. I am not confident as I sit here today that significant price gains will be seen in 2016. But I am confident that in the next two, three or four months at the outside that these markets will make major lows.”
Hightower said markets can stay irrational longer than you can remain solvent. “We’re in the midst of a switch from paper assets to physical assets. The gold market and the platinum market are prime examples. Production is falling. They’re halting exploration. They’re halting equipment purchases. We’re going to get into a situation where we have a number of commodities that are tight. The wheat market and the soybean market are not going to sit at depressed deflated values if the rest of these markets (move higher). A rising tide will lift all boats.”
Although a number of analysts believe the grain market will maintain a bearish tone throughout most of 2016, Hightower said is looking for a rally perhaps as early as the first quarter of 2016.
“Don’t be lulled to believe that this bear market is going to continue,” he said. “I think it has less of a timeframe than many think.”