Wheat's biggest bull market could be about to end badly

Take a look at the chart for wheat. Does it look bubbly familiar? This, my friends, is an accident waiting to happen.

Yes, I know all the arguments. Asian diets are improving, their middle class is growing, they’re eating more meat, more grain has to be grown to feed the livestock, the drought in Australia has hit wheat supply, the Americans are using their corn to make ethanol, more fields are being turned over to corn, inventories are low, supply can’t meet demand, monetary inflation means higher prices in everything, what if we get bad weather and it kills the harvest?

I know all of this. They are all utterly convincing arguments that hold a great deal of truth – it’s because of this credibility that more and more people are climbing on board and pushing the price up further.

Nevertheless the price has got way ahead of itself in my view and is due a correction, potentially a nasty one. All the risk is to the downside.

This bull market began in 2000, but until very recently nobody was talking about it. Now the world, his wife and their shoeshine boy seem to be long grains. Not a good sign.

Great bull runs often end with a series of limit-up days (this is when the maximum daily move on the exchange is reached – unlike the FTSE 100, some smaller exchanges try to control volatility by limiting how far a price can rise or fall in a single day). We saw three limit-up days in a week a fortnight ago. The 30c limit has now been upped to 60 cents. We saw another limit-up on Monday and again yesterday. Is this your classic blow-off top? Many chartists would say so.

Looking at previous bull markets in wheat, the biggest was in the six years to February 1974 in which we saw a 312% move. Before that the biggest move was 173% in the four years to May 1898! In other words, as I pointed out at the beginning of this email, this eight-year, near-400% move, is the biggest in wheat’s history.

The subsequent corrections in virtually every major bull market in wheat saw it give back almost all of its gains. “Give back all of its gains?” I hear you say. “But that would take us back to $2.50 a bushel. Wheat’s up by over $2.50 this month alone.”

What goes up …

One of the consequences of the high cost of grain is that it has become expensive for farmers to feed their cattle and pig. In fact, it’s so uneconomic many have been sending their livestock to an early slaughter. This has led to there being rather a surfeit of meat on the commodities exchanges with the resultant steep decline in the price of hog and cattle (this despite the rise of the new meat-eating middle-classes in Asia we hear so much about).

Further down the road, as more stocks are slaughtered, what surely lies in store is a shortage of pig and cattle to eat all this wheat. Meat, not wheat, is where you should be looking for an entry point in the coming months. As for wheat, your eyes should be looking towards the exit. You can learn more about how to buy into meat (and other promising softs) in this week’s MoneyWeek cover story (out on Friday). If you’re not already a subscriber, click here: 3-week free trial.

Moving back to metals, Mark Twain once described a mine as: “A hole in the ground owned by liar” and the small mining sector seems to have a phenomenal amount of rogues and charlatans operating in it. I’ve been looking at two junior oil and exploration companies with assets in Syria and Northern Iraq. Yes, Iraq. One is a shining example of how a company should be run; the other has been a catalogue of, to put it delicately, exaggeration. In a future Money Morning I plan to compare and contrast the two to show exactly what to look out for and what to be wary of in a junior resource company. I just need to check with the lawyers first what can and can’t be said …

Turning to the wider markets…