I’ve copied this editorial from Bill Gary’s Sept 11, 2010 market letter. I’ve subscribed to his letter for years and have interviewed him several times for the Moneytalks radio show. He is in his seventies and has traded and written about Ag commodities since the 1960’s. He lives in Oklahoma. He sees a new era ahead for global Ag markets and explains why in this editorial.
I recommend him to you.
DEMAND MARKET ERA…
Since the Seventies, I have written many editorials about Demand Driven Markets. I thought it might be of value to once again describe this type of market environment and the stages that typically occur as bullish forces unfold. We all know there are two sides to the price equation…supply and demand. However, economists and market analysts traditionally concentrate on only one side… the supply side.
The reason for one sided analysis is the fact that supply is easily seen and counted. The supply side is relatively easy to solve.We can see the acres planted and count bushels in storage. We can read about droughts in Russia and calculate the supply that will be lost.
However, demand is invisible and elusive. It is hard to measure and even more difficult to forecast. Demand is fickle… It can be spread out over the course of a season or it can come in compressed bursts of panic buying.
When grain supplies are excessive, as they have been the past two years, users pare inventories and pipeline supplies are reduced to avoid even lower prices in months to come. After all, in the new global marketplace, shortages in one nation can be offset by imports from another. The process of contracting inventories and pipeline supplies makes demand appear worse than it actually is.
Conversely, when supplies tighten and prices rise, users want to buy ahead before prices trade even higher in coming months. The process of buying ahead creates inventory building and refilling of pipelines, making demand appear better than it actually is.
Demand driven markets have the following characteristics…
- They begin when supplies are burdensome.
- Users have not bought ahead, expecting lower price in the future.
- Indications of expanding demand are ignored due to complacency toward supply.
- Trade sentiment remains negative, even as prices initially advance.
- Supply and demand estimates tighten only gradually because demand is based on recent experience, not future prospects.
- As supply and demand estimates tighten, top picking becomes a favored pastime, adding fuel to the eventual bullish fire.
- New sources of demand are uncovered as those waiting for a price setback finally succumb to the fact that prices are not going to fall substantially.
- As prices reach altitudes unimagined just a few months ago, demand continues from hoarders and those buying hand-to-mouth. This stimulates even more speculative buying and the market enters a “blow off” phase.
- Following the final accelerated advance and initial price collapse, supply becomes available from hoarders and the demand driven market cycle is completed for that commodity.
I began my commodity career during the Sixties when grain surpluses were chronic and a seasonal move from low to high in corn was ten cents per bushel. Nobody was prepared for, or anticipated, the demand driven markets that were to follow in the Seventies.
Demand markets of the Seventies came without warning,without precedent…
- Fundamental supply/demand balances were based on past experience and became of little value.
- Old standards of value no longer applied.
- Market perceptions changed. Commercial users were forced to buy ahead as risk exposure to higher prices was greater than benefits received when prices retreated.
- ·Exports became controlled and were not encouraged.
- Governments could print money, but they could not print food and other commodities.
For nearly ten years, demand driven markets shifted from one commodity market to another.
Some economists explain that developed nations contain about 15% of the world’s population, but consume about 65% of the world’s commodities. As incomes in China, India, Brazil and other densely populated nations grow in years ahead, demand for commodities, especially food, will grow by unprecedented margins.
The era of cheap food commodities is ending. A new“demand driven” era is unfolding. This year’s wheat crop failure in Russia demonstrated just how fast perceptions of surplus can shift to shortage. Demand markets offer traders the greatest profit potential because they hold the largest element of surprise and are the least understood. To successfully trade this type of market requires… Courage to go against conventional wisdom… Confidence in your market belief… And, Concentration on an individual market.