CTCR: Interview with Bill Gary Part 3

I believe that the more fundamental analysis you can do or the more fundamentals you can understand about the market, the better your odds will be in making money in the marketplace.

That's a very good way to look at it. Let's go back and talk about the Corn report you published last year. We had this basic case for Corn. We don't know how this is going to play out because none of us know exactly how the future is going to come about. So we have what we call milestones or guideposts. One example is the stocks report that comes out quarterly. We know that the stocks figure has to be within a certain range to perpetuate our outlook for that price to occur. If the stocks are lower or if the supply/demand ratio is even tighter than we had forecast then that means that we're not looking for quite high enough prices yet. There are those kinds of things you use in fundamentals that you use as the market unfolds. If I know that a market has that kind of potential then I go back and figure out how I treat this market. I go back and look at patterns like the conditioned seasonals and the pure price patterns. I'm going to find similar yearsand then look at the price charts for those years. In some of those years the price will go up immediately and you make the highs in October-December. In other years, you didn't make the highs until maybe July. What caused that? We started in similar supply/demand tightness. Why did some years peak early and others late? Well, markets move up in one of two ways. They move up in anticipation of something or in realization. In some years, particularly back in the 1970's when you had a market psychology that was bullish on commodities, then people ran out and bought ahead of time. In other words, they worried about the price being high next year so they would contract now ahead of time to ensure themselves of the supply. Then speculators would say, hey, this thing's bullish and they would jump in and buy it early. So if the price went up too far too early then that is an anticipatory move. The market tightens itself out of consumption early so you will make the highs early and then your demand is not quite as strong as if the market had gone up in a slow process just like Corn did this last year, which is a realizing move. When a market goes up in realization, it goes up because people don't really see that you have a bullish case and they don't buy it. They just continue to buy and use on a hand-to-mouth basis. That's the best kind of bull market because you keep demand priced in all the way until the end. That's what we did in Corn this year and that's why we went to record high price levels. We've become very sophisticated in many ways. We are using computers and mathematical techniques for technical analysis but industry uses on-time inventory management now. No one wants to keep money invested in inventory. They want to minimize costs. They have become very accustomed throughout the 1980's and 1990's to prices not really changing by a great percentage. You have had relatively stable commodity prices. So that has helped perpetuate this on-time inventory management. We caught a lot of users without forward coverage. They just weren't going to buy because the price in past years and recent history had not gone up enough that it would have paid for them to have gambled and taken on this inventory. These are just repeats of history. The same thing happened during the 1960's. We had tremendous surpluses of grains. We had the same type of psychology. We didn't have on-time inventory management then, we just let the government carry the inventory. When the price got above the price of loan and the government sold you what you needed, that was great. Everybody got very accustomed to that throughout the 1960's. It hardly ever got out of whack. It was a great deal if the price of Corn had a 10 cent yearly range.

The grains used to trade in eighths back then!

Yes, I remember that we used to trade odd lots on the Chicago Board of Trade. They used to trade 1,000 bushel lots back in the 1960's. These things are going by the wayside now. Then we got into the early 1970's and we started to export more. Russia started to buy more. People just didn't realize the significance of this and that we were going to come out of this era of chronic surplus and what could happen to prices. We had the initial shock in 1973. It was interesting that it brought on the move to inflation and the fight against inflation and this move of liquidity into physical commodities. Once again, we have gone through a decade of having surpluses. Now those surpluses are gone and this time it's Asia that is increasing demand. This is the most populous concentrated place in the world. They have the money to buy; we're not selling to them on credit. This demand is not going to disappear any time soon. Here we are again with this same surge in demand and we've caught everybody playing the same old game. We are in for some tremendous markets for several years to come.

Do you use other fundamental techniques, like regression models?

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What Happens in Years of Price Collapse into Summer?

December Wheat - Chicago
Years of 20% or more price decline from January-April high to May-July low.

Year Ranked (1)	Jan-Apr High	May-July Low			Subsequent Low			Subsequent High
Year Ranked (1)	Jan-Apr High	Date	Price	%Change	Date	Price	%Change	Date	Price	%Change
1990	3.79	07/31	3.03	-20	11/19	2.38	-22	08/09	3.07	+02
1981	5.43	06/30	4.12	-24	12/16	3.62	-12	11/02	4.44	+08
1992	4.40	07/31	3.27	-26	08/13	3.12	-04	11/30	3.81	+16
1977	3.20	07/28	2.32	-27	08/22	2.25	-03	11/16	2.84	+22
1975	4.43	06/13	3.07	-31	12/15	3.18	+03	08/21	4.67	+52
1996 (2)	6.33	07/26	4.37 (3)	-31	-	-	-	-	-	-
1974	5.82	05/07	3.44	-41	09/04	4.08	+19	10/25	5.36	+56

(1) Ranked by percent decline from January-April high to May-July low.
(2) Year of previous historic high
(3) To date

Comments:

The greater the percentage decline into summer, the less futures tend to decline after July. In years when price fell 27% or less from January-April highs, futures attained lower lows after July. In years when prices fell more than 27%, futures did not attain lower lows after July.
The greater the percentage decline into summer, the greater the rebound into the second half of the year. In years when prices fell 27% or less from January-April highs, the rebound during the last half of the year was mediocre. In years when prices fell more than 27%, futures experienced a significant rally into the last half of the year.
This year (1996) is associated with years when seasonal lows were attained by July 31 and the price recovery during the second half of the year was significantly above May-July lows.

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