Editor’s note: Yesterday, we heard from Casey Research founder Doug Casey about three top metals that are often overlooked.
Today, we return to the topic of commodities with a look at one of Doug’s more unusual plays…
It’s not gold, silver, or any other precious metal. But it involves an overlooked sector of the market that’s ripe for speculation… and as Doug explains below, it illustrates a key investing lesson that’s brought him life-changing wealth…
Daily Dispatch: Our readers know you for all the work and knowledge you have in commodities. For that reason, I’m sure they’d love to know what commodity, if any, you’re trading right now.
Doug Casey: Hogs.
Daily Dispatch: Hogs!
Doug Casey: Yes. I own cattle down here in South America, both beef cattle and dairy cattle, and I spent a few years growing up on a dairy farm. I also live in Colorado. So I have some familiarity with the cattle market, but I didn’t previously have much knowledge of the hog market. I’ve speculated in the cattle markets, but never hogs. But then a friend of mine in Aspen, who’s one of the world’s best-known hog traders, drew my attention to it.
It was around the time when the African swine fever (ASF) started. He told me – and I guess most people have never heard about this – that ASF had killed about half the hogs in China. That’s important because China is by far the world’s largest producer and consumer of hogs. It produces about half the world’s hogs.
The ASF has spread from China throughout Eastern Asia. It’s even in Eastern Europe at this point, and could go further. It’s not over yet. But now we get into the interesting stuff. When about a quarter of the hogs in the world all die, you’d think the prices would explode, right?
Daily Dispatch: You’d think so. Just like if a quarter of the world’s iron ore mines shut down, you’d think the iron ore price would explode higher.
Doug Casey: Well, the fact is that hogs right now are priced in the 64 cents-per-pound range. Most American hog producers are losing money. They just can’t make money on hogs at these prices. Even though both soybean meal and corn – hog feed – are also very cheap. Soybean and corn producers aren’t coining money, either.
Of course, the cost of the feed is a major cost of hog production. So I’m looking at the situation now, and saying to myself, “What’s the best way to play this?” Because the volume of American hog exports, even to China, with this current trade war, is high. Hog prices in China are about three times the price of hogs in the US. You’ve got to be bullish on hogs.
But there are so many factors when trying to figure out the commodity price of any meat. For instance, if you have a good hog breeding operation, a sow will have 30 or even 35 piglets per year. That means, theoretically, every year the number of pigs in the world could multiply like rabbits. If every sow has 30 piglets, and half of them are females, they will also reproduce.
Then there are other things to consider. What’s the average weight of the hog? What’s the ratio of pork bellies to pork shoulders? What’s the ratio of hog prices to beef and chicken? It is a very complex thing. Farming has actually been scientific for a long time. It’s industrialized mass food production today. The old-fashioned family farm is history.
Daily Dispatch: That brings us back to our question…
Doug Casey: What would I do? Or more precisely, what have I been doing in the hog market? For the last four or five months, I’ve been selling puts, where the premiums have been very high. I haven’t been long hogs per se, just short the puts. Because eventually, it’s going to go from far too few hogs in the world to feed the Chinese, to far too many hogs, because they reproduce so quickly. And then a year from now we could have a hog glut, and the price could crash. But hopefully only after it goes over a dollar a pound.
And while the ASF has been devastating for the industry, these things tend to burn themselves out. Just like the AIDS virus burned itself out. The coronavirus is going to burn itself out. And at some point, the African swine fever will burn out. Then there will be a huge glut of hogs, because everybody’s now trying to produce them to make up for the deficit.
Daily Dispatch: And so for now, for you, you believe selling puts is the best way to play this?
Doug Casey: Yes, I’ve been selling puts, because the premium on the puts has been huge. Incidentally, when it comes to this type of thing, I rarely buy options. I prefer to act as an insurance company. In other words, when you sell puts, you’re selling a wasting asset and in return you receive an upfront cash premium. If everything stays the same, the market value of the option goes to zero, and you keep the cash.
You don’t have to be very right to win, which you do with buying an option. It’s just important not to be very wrong when you’re selling options. It’s much easier to not be very wrong than it is to have to be very right.
And that goes back to what I’ve often said before. It makes sense to have broad knowledge of many things, and to watch all the markets, because you just don’t know where the next opportunity will pop up.
If you know nothing about a particular market, or you aren’t even aware that market exists, the train is going to leave the station without you. You’ll only hear about it when it’s too late. For instance, like buying tech stocks right now, when early investors can crow about big gains. That’s usually when it’s too late. The time to have bought was years ago. Now’s the time to sell tech stocks.
Here’s the point. If you want to buy something cheap, now’s the time to look at commodities.
Daily Dispatch: Thanks for talking with us today, Doug.
Doug Casey: You bet.
Editor’s note: Like Doug said above, it’s important to have a broad knowledge of all markets, not just the ones that make headlines… because it’s often the overlooked opportunities that can deliver massive profits.
That’s why you need to watch this urgent video update from Casey Research’s commodities expert Dave Forest.
It includes a $1,400 5G phone… a hammer… and a $2.7 trillion tech secret. And it involves a group of metals that few have heard of…
You need to see it for yourself (especially the first 47 seconds).
Because if you watch this demonstration – and take the steps he recommends – you could see up to 30 to 60 times your money… in months, not years.