Rich Posson: Milk trades catch up
It was March 2006, and I told a milk producer to consider a long-term long position for late 2006 into if not through 2007.
The flagship of a futures strip was the JUN 2007 contract. A recommendation was made to buy JUN at 12.19 in March 2006 and for a long-term buy and hold. JUN's price so far this week was over 18.00.
In late 2006 into first quarter 2007, I was of the opinion that the market should trend to 18.70 per the long-term business cycle.
Although I will be bullish into 2008 or 2009, the milk market has met the first long-term target (or close enough) and at a time when the shortest business cycle can peak. With the current trend straight up with ever-increasing thrust (size of up days) and extreme overbought condition, I must consider milk is a bit ahead of the supply-and-demand trend. Milk is overvalued, if only for the short-term.
With my bullish long-term forecast for commodities, I am not forecasting a typical response from a long-term top, if it should occur now and through May. A typical response from a business cycle top would be a downtrend for 12 months. If the 2007 forage and grain crops finish as "good" crops and there is not a summer heat-induced milk production reduction, I believe the bearish influence from such a top will cause only correction(s) within an uptrend into 2009.
A crop problem or 2%+ reduction in milk supply should create a late 2007 bull market and a peak in late 2008 with potential for a record high price. The reason for not being as bearish as past years is that the decadal and multidecadal business and related price trends were forced to be more complex due to the 2004 bull market as too high price. The business cycles rarely skip a top, and such occurrence is only for the shorter of business cycles. But, we have a setup for a skipped beat of the market place.
Although milk could now collapse by $1.00 to $2.00, the trade should keep in mind that the level of undervaluation can be achieved at higher price than in past years.
Intermediate trend models may be more beneficial than following the long-term at this time. Said models seek a top for milk and cheese. Intermediate trends come in a variety of sizes, but by my model definition they do not last longer than 5 months. Current forecast calls for a 1- to 2-month correction and not the super-size variety.
Technical factors suggest an extremely overbought condition.
We are close to a call for a strategic entry. It may be to hedge inventory such as forward contracts. It may be to buy meal.
I believe I was the only analyst from 1993 to 1998 to forecast a major bull market (huge price increase) for 2004 to 2008 for corn. During that time, I was bullish commodities in general with expectation of new record highs. In 1998, Jim Rogers, a far more known market prognosticator than I am, turned bullish commodities. Like me, I am sure he became the odd man out in relation to industry comrades and counter parties. Around 2002, the tide changed. The number of bullish enthusiasts increased, and this trend was still intact by 2006. As a contrarian, I do not see sufficient evidence that there are too many bulls running in the pack.