The following editorial was published in Price Perceptions issue #1417a on September 11, 2010
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...
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...
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.
TRADING IN COMMODITY FUTURES OR OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
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