Most people should not invest or speculate on commodities and it has never been the bulk of our investment strategies.
Soft Commodities are goods that are consumed most of the time and where demand-supply is usually tight and often disturbed by highly unpredictable climatic conditions or, even worse, parasites and bugs.
Nevertheless, there are times where sentiment on these commodities goes to extremes and we have probably reached this point where, after several years of bear market and significant declines in prices, sentiment has reached extremes of pessimism that always led to significant gains in the following months.
We started building our baby-steps positions in soft commodities in our Model Portfolio in the past few weeks and we are now increasing them significantly as we see limited downside from here while the upside could be significant.
Negative Sentiment is at Extremes
The following chart shows that in 28 years, sentiment has NEVER reached such a negative reading with only 18 % of positive views on Soybean.
True, there may be the impact of the Trade War and China’s refraining or not to buy Soybeans form the US but these are short term phenomenons that do nt change the final demand equation for Soybean.
In the past, when such readings where attained, the commodity rose sharply in the next two months 100 % of the time.
The Chart of Soybeans looks truly ugly, but with sentiment as low as it is and massive short positions having been built, the potential for a sharp move up is high.
The same actually applies to most grains and soft commodities.
After a bear market that stared in 2012 and took prices down from 800 to 360. Corn has been consolidating for the past 4 years around current levels and flirting with the long term uptrend, a significant support.
The bear market in Wheat started in 2008 and saw prices falling form 1300 to the current 433, a level very close to the very long term uptrend of the commodity.
After almost 7 years of a bear market that has seen Sugar prices fall from 35 to 12, Sugar is building a strong base and is already giving signs of wanting to move up.
Coffee has been going down, down and down again since 2012 despite the sharp expansion of coffee drinking habits in China. Prices have fallen from 300 to 90 and from 170 to 90 in an uninterrupted fashion since 2016. At these rates or lower, producers swill stop producing. We are at levels last seen in 2004
At a time where volatility is bound to come back in the financial markets, where equities are outrageously expensive and where there is no value in bonds, a small percentage invested in commodities may provide a beneficial risk diversification.