“There’s no doubt that 2017 prices will be lower than 2016 prices…”
That’s the type of statement you hear only after years of sustained downturns when all hope is lost.
It’s also what you when investors are most worried, prices are cheapest, and it’s time to buy in.
Revealed: My Next Big Trade Idea
The best investments come when an asset class has suffered sustained losses for years.
If you look at the commodities boom this year, the biggest winners have been those that performed worse leading into 2016.
Gold, silver, coal, and iron ore were all in multi-year bear markets before this year.
In late January, the bottom came in. They all turned. And now they’ve all doubled or more since then.
That’s what we could be seeing again very soon in another commodity which is currently priced where those commodities were earlier this year.
If you’ve been watching the commodities market at all, you’ll see not all of them have had a great year.
In fact, agricultural commodities have missed the current rally altogether.
Livestock commodities specifically, are actually down for the year.
And that’s where the big opportunity is coming together for investors right now.
Lean hog prices on the Chicago Mercantile Exchange have fallen from a high of $130 in 2014 to a recent low of $41.
The near 70% decline in prices are having a ripple-effect through the entire industry.
Hog farmers can’t make any money at that price and usually lose money.
As a result, they have to cut their losses by sending more hogs to market than they would just to reduce cash outflows.
That, in turn, reduces prices even more.
It’s a vicious cycle, it’s playing out right now, it has driven hog prices to 14-year lows, and it’s on the verge of turning around quickly.
Just listen to what the industry is expecting in the next few years.
In Farm Forum’s article titled Livestock's Bleak Industrial Future, the editor states, “Today’s crushing livestock markets are going to get far bleaker before any gets remotely better.”
Also in the article, Andrew Griffith, an agricultural economist for the University of Tennessee, stated, “There’s no doubt that 2017 prices will be lower than 2016 prices it is likely 2018 prices will result in another decline and large losses. Prices will likely be below 2016 levels in 2019.”
That pretty much sums up the common outlook on the livestock market.
It’s sounds bad. Real bad.
However, there’s a much bigger point to be found in all this for contrarian investors.
The Sky Is Always Darkest...
We’ve seen this happen time and time again in the commodities industry.
When fertilizer prices are down, fertilizer producers close mines and reduce supply, prices rebound, and new supply comes online.
The same cycle for gold, copper, iron ore, oil, and nearly every other commodity.
Right now supply is winning out in livestock market -- especially in lean hogs -- and everyone expects it to last forever.
History has shown that’s rarely the case.
We talked yesterday about how two major factors can combine to create the biggest trading opportunities.
The first factor was when an industry and investors extrapolate a current bad trend indefinitely into the future.
The second factor was most investors being focused on the wrong things like trying to predict the Dow’s next move instead of looking at a market where prices are down 70% and showing all the signs of a bottom.
In this case, both those factors are there.
Once cattle and lean hog prices start to rebound, it’s going to be time to buy big.
These commodities are highly cyclical, but when the down leg is past and a new up leg begins, there will be triple-digit gains to be had for those watching now.