Alan's Alert 7-20-2021

 

In Philip Fisher's book, “Common Stocks and Uncommon Profits”, he stresses the significance of understanding the company that you are buying stock in. He goes so far as to advise calling up the company to talk to the CEO, CFO, or even the secretary, anyone who will take your call. Go to their office building and quiz them on their business.

“Buying a company without having sufficient knowledge of it may be even more dangerous than having inadequate diversification.”

When I first read this, I thought he was nuts. Who would take my call and would they give me any information that would help me make an investing decision? As I've developed my investing technique over the years, I still reflect on that book. I believe some of the wisdom that Mr. Fisher put into his book is timeless including doing your due diligence when looking to invest in a company.

With that said, I've spent the better part of the last two weeks interviewing farmers. This isn't difficult for me. You see, I've been connected to agriculture my whole life. My grandparents farmed dryland wheat. My parents had an orchard and a vineyard. I work for an orchard. All my neighbors farm, work for farmers, or are service providers to farmers. Talking about bushel yield, the importance of timing of your third cutting, and what happened to the Easterdays is typical “watercooler” talk. If you really want to get the scoop on what’s happening, you go to the local watering hole when it opens in the morning. That's where the “old-timers” hang out. These guys are old school. They've put in the time on the tractor seat and have decades of farming knowledge.

All the farmers I interviewed have in two things in common; they are loaded with knowledge on getting a high yield in the field and they don't believe that the commodity rally is over.

Every farmer I spoke with, both retired and currently farming, told me that their goal every year was to sell all their corn before the 4^th of July (This isn't the kind of corn you buy at the store; this is field corn, chicken and cow feed). This is because of the USDA crop production reports that come out in July. The USDA puts out a monthly crop production report but typically, the July report paints a rosy picture of what the fall harvest will look like. This crushes the price and any farmer holding past this point looks like a dummy. Several of the farmers I spoke to about these reports did not have nice things to say about them. One even accused these reports of being “borderline fraudulent”.

As a farmer, you estimate your crop as the year goes on. You then sell all or most of it prior to harvest. Now, these guys don't bill themselves as experts in the futures market. In fact, one warned me, quite sternly, not to “play with futures”. However, from my perspective, these guys know how to work the market. They do it every year. They have strategies and trading rules (don't sell it all at once), they know that they need to cover their costs, and even have a mantra (sell by the 4^th of July). In fact, their livelihoods depend on their market timing skills. So, when these farmers told me that this year is different, my ears perked up.

 

Every single one of these guys told me that they did not follow their own trading rules this year. When I asked why and how much they presold, I got a range of responses. A couple guys presold 50-60%, one said 70-80%, but one farmer told me 0%. I was quite shocked by this gentleman's response because I know him quite well.  Also, he has been at this game for a long time.  In fact, he has been farming for more years than I’ve walked this planet.

I asked these guys what made them so convinced that this year was different.  Many referenced the hot weather and drought conditions:

Some of them also referenced the strange happenings in the market.  Since these guys watch the market like a hawk every year, a couple of them picked up on the price acting “funny”.  Only one of the farmers I talked with mentioned inflation as a potential cause.

One farmer I spoke with mentioned something that truly caught me off-guard.  He said that he was having trouble getting parts for his equipment.  This is unusual.  I mentioned to him the issues at the ports and how the trains were now backed-up.  He extrapolated out a dire situation.  All farm equipment breaks down.  It’s something all farmers expect to happen throughout the year.  He said that when the corn harvest starts, if the parts aren’t there to repair equipment, it would stall the harvest.  If parts are scarce enough, some guys might not be able to harvest at all.  This added a whole new dimension to the math on this trade.

Inflation + reduced crop yields due to weather + parts shortages = high prices

I’m now working through the past years’ worth of USDA reports.  I doubt I’ll find any gems in there but I wanted to have a background for when the new reports come out.  They are published on a monthly basis and I’ll be reporting on them moving forward.  I expect the trading in farm commodities to intensify around these report releases, as they begin to paint a more dire situation.  In wheat, we are already witnessing it happening:

As Robert Wenzel used to say, “hug your gold coins”.  I might add; and your corn.

Alan's Alert 6-16-2021

 

I have a running joke with a contractor friend of mine about the ridiculousness of the lumber industry.  We’ve traded memes back and forth.  Some of the best ones were; the most expensive place to take a girl on a date is the lumber section in Home Depot and that toothpicks could be sold as lumber seeds.  While lumber futures (ticker /LBS) have come down from their highs, they are still well elevated from what many would call normal.  We’ve seen similar reactions in futures markets for Corn (/ZC), Lean Hogs (/HE), Copper (/HG), and soybeans (/ZS).  While the lumber industry has its own unique quirks, it’s a bit of a shock to see the same scenario play out in unrelated markets.  Could oil and gas be the next markets to experience a similar run?

 

This morning the EIA (Energy Information Administration) released their gas and crude oil stocks report.

The report on crude oil inventories showed that it dropped by 7.355 million barrels during the June 11^th week.  This represents a fourth consecutive period of decline.

The gasoline report showed an increase of 1.954 million barrels.  This was opposite of market expectations of a drop but you can see from the chart of gasoline inventories that we are swiftly moving back to depleting inventories.  This comes as the summer driving season is beginning, as well as air travel increasing.  Here’s a summary report for TSA screened passengers on average by month:

We are well off the shutdown lows and as you can see below, oil futures (ticker /cl) have rebounded completely.

Now I’ve been holding Continental Resources (CLR) since 4/13/20.  I also have options on USO that were purchased 2/8/21 & 4/29/21.  I’m confident that this story isn’t over.  The Fed has pushed too much money into the hands of consumers for us to only be back where we began.  This money has made its way into the retail and real estate sectors of the economy.  We are seeing record prices for used vehicles.  I hear ads on the radio now about turning in your old RV because RV sales have gone through the roof.  I believe we will continue to see crude climb and I plan to be ready to add to my holdings when down days come.  I love buying on red days and selling on green ones.

 

As a reminder, the Federal Open Market Committee (FOMC) concludes their meeting today after which, they’ll release some economic projections, their interest rate decision and hold a press conference.  They hold eight of these meetings a year.  Only four of these meetings are associated with economic projections.  The market typically gets pretty excited about such matters but there is rarely anything groundbreaking that will be revealed.  The Fed doesn’t like to surprise the market, so they’ll announce well ahead of time what course they plan on plotting.  I’ll cover any details in tomorrow’s alert, in the meantime, here’s a sneak-peek into what the meetings look like.