Wheat can wait

GUEST COLUMN

The sentiment for wheat is turning positive but one cannot completely rule out a downside yet.

It's not very tough. Moody's did it recently when they discredited their near 100 year old rating research history by giving an overwhelmingly positive rating to some undeserving Icelandic banks.

These goof-ups happen all the time. If you are a trader, you would understand that there is always a 30 per cent chance that your trade would hit the stop loss and it is the other 70 per cent that you need to ride on.

The market is full of surprises and you just have to be alert not to be fooled more than 50 per cent of the time. If you beat this statistics, you just avoided being AAAssed!

Unfortunately most people are weak in both mathematics and history. Most of us have little knowledge of history and hence the question of learning from its seldom arises.

And even if we do understand, chances are we would mess up with the risk-return calculations. So fooling around happens all the time and if this time it was the Moody's, it's very normal. The law of averages invariably does catch up.

At another level, there is some fooling around happening in our local markets too. The local politicians in the country do not understand that Futures are risk management tools.

Probably because they do not know the history that Futures were constructed as early as 1607 by the Japanese traders to protect the rice farmers, not to cheat them.

We covered Wheat in the Smart Investor dated November 6, 2006 and January 22, 2007. The first time we covered the grain, it was going up and the United States department of agriculture was pressing alarm bells on wheat. And the local newspapers were crying horse over an impending wheat crisis.

All the stories pointed to a price increase. This was the time we gave a potential limit of International Wheat prices at $ 6 per bushel and a turn down from there.

This was when international spot prices were ruling at $ 5.6. Prices tested near $ 6 levels on April 30 and are now below November prices. The local NCX Wheat spot fell 23 per cent during the same period from Rs 1165 per quintal to the current low near Rs 900.

One can of course justify the fall in price. There is always a reason for everything that happens. But these reasons still can not tell you the entry price or target for Wheat three months from now in spite of what the Forward Markets Commission or the politicians might do.

The historical truth is clear, markets were created for the farmer. And hindering the market assuming that food prices can be managed is as wise as Moody's rating for Icelandic banks.

Internationally, prices still look weak and some more easing cannot be ruled out. And even locally any reprieve back to Rs 1000 on NCX Wheat should be short lived and needs to be reviewed.

Although simplistic, the crisis talk, the alarm bell, the import rush for grains, is too obvious. The sentiment thus is positive for Wheat prices.

But it might be early to bottom pick on the grain for an intermediate term (multi week to multi month) rise. You have to hold on till insanity reaches an extreme and sanity shows first signs.

Mukul Pal, CEO, Orpheus CAPITALS, A Global Alternative Research Company