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05 Feb 2020

The Chinese trade war is affecting American soybeans test

Sure is tough to be an American farmer these days, with headlines like this popping up around President Trump’s ongoing trade war with the Chinese:

Nowhere is this pain being felt more than in the Soybean market, which is the second largest financially important crop in the U.S., with $41 Billion with soybeans grown in 2017 behind Corn at $48 billion. China is the world’s biggest importer and America’s largest customer in a trade worth $14 billion in 2017. But while it makes for a good headline, that 42-year-low was only about 10% lower than where the market had been a few weeks prior, and only about 3% lower than where prices headed after the initial skirmishes in the trade war last summer. In more finance geek speak – this is not a black swan event, as we’ve known about this market risk since at least May of 2018.

But that doesn’t leave the farmers in any better of a place, especially with all of the rain and wet conditions that have been seen across the Midwest, and we’re seeing that in terms of acres of Soybeans being planted dropping significantly. Here’s the USDA showing just 19% of the Soybean crop is in the ground so far, compared with 47% usually seen by this time of year on average between ’14 and ’18.

We caught up with Doug Bergman, the head of RCM’s AG Trading desk and publisher of daily Ag research for his thoughts on the choices facing the nation’s Soybean farmers:

In my opinion, the easiest way to see the impact is to look at the cash soybean price in Brazil (purple line) vs. cash bids in the US (orange line). You can see the dramatic drop in U.S. prices vs. Brazil last spring and then a small move that started just recently when news broke that a trade deal was not likely to get done. Beyond that, there is a lot of uncertainty regarding another round of government support and what farmers should decide to plant this spring. Planting is delayed due to wet weather, which is leading many to consider taking preventive planting insurance payments. If there is another round of government support payments, the producers that took an insurance payment rather than raise a crop would be left out of the government payment. So do you take the lower risk approach and collect insurance to maybe breakeven, or do you plant beans into less than ideal conditions expecting another government bailout where if the weather cooperates this summer could end up being profitable.

 

27 Sep 2019

The Chinese trade war is affecting American soybeans

Sure is tough to be an American farmer these days, with headlines like this popping up around President Trump’s ongoing trade war with the Chinese:

Nowhere is this pain being felt more than in the Soybean market, which is the second largest financially important crop in the U.S., with $41 Billion with soybeans grown in 2017 behind Corn at $48 billion. China is the world’s biggest importer and America’s largest customer in a trade worth $14 billion in 2017. But while it makes for a good headline, that 42-year-low was only about 10% lower than where the market had been a few weeks prior, and only about 3% lower than where prices headed after the initial skirmishes in the trade war last summer. In more finance geek speak – this is not a black swan event, as we’ve known about this market risk since at least May of 2018.

But that doesn’t leave the farmers in any better of a place, especially with all of the rain and wet conditions that have been seen across the Midwest, and we’re seeing that in terms of acres of Soybeans being planted dropping significantly. Here’s the USDA showing just 19% of the Soybean crop is in the ground so far, compared with 47% usually seen by this time of year on average between ’14 and ’18.

We caught up with Doug Bergman, the head of RCM’s AG Trading desk and publisher of daily Ag research for his thoughts on the choices facing the nation’s Soybean farmers:

In my opinion, the easiest way to see the impact is to look at the cash soybean price in Brazil (purple line) vs. cash bids in the US (orange line). You can see the dramatic drop in U.S. prices vs. Brazil last spring and then a small move that started just recently when news broke that a trade deal was not likely to get done. Beyond that, there is a lot of uncertainty regarding another round of government support and what farmers should decide to plant this spring. Planting is delayed due to wet weather, which is leading many to consider taking preventive planting insurance payments. If there is another round of government support payments, the producers that took an insurance payment rather than raise a crop would be left out of the government payment. So do you take the lower risk approach and collect insurance to maybe breakeven, or do you plant beans into less than ideal conditions expecting another government bailout where if the weather cooperates this summer could end up being profitable.

 

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27 Sep 2019

The ‘right twice a day clock’ that is gold.

We have long been in the Warren Buffet camp in relation to Gold:

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Gold sort of acts like the proverbial clock that is right twice a day, and (which is rarely said) wrong the other 1,438 minutes. Gold Bugs were finally proven right for 10 years between 2001 and 2011, after waiting for a dozen or more years for Gold to break out of its doldrums. But then the clock went right back to not working so well with the yikes moment starting in 2012 where it fell more than 40% off its highs, and then another five years of basically no movement, as it was stuck in a range between $1,150/oz and $1,350/oz.

If the chart above doesn’t make it abundantly clear – Gold is not a US savings bond or money market replacement churning out a nice annual yield. Gold is a commodity, with all of the commodity volatility the disclaimers warn you about. A 13% drop in 2 days back in 2013 isn’t exactly the kind of safe, smooth return many selling you Gold would have you believe, and in fact Gold’s kurtosis reading is about 4 times that of a normally distributed curve (meaning 1 in 100 year storms will be much more frequent than you would expect – and way more than a savings account).

And, of course, you can do way worse than investing in volatile gold. You can buy gold coins or gold miner stocks. One, you’ll pay an insane markup, and the other, be at risk of CEO mistakes, debt loads, mining accidents, and so forth.

Which all leads us to Gold’s recent price action, where some are starting to say “hmmmm” again following its breakout to new 5+ year highs.

First, Suki Cooper, precious metals analyst at Standard Chartered Bank.”via Marketwatch

“This is as dovish as we could have potentially hoped for and the gold market has jumped straight on that. The dollar has come off and gold in tandem has rebounded higher.”

And then David Sneddon, global head of technical analysis at Credit Suisse, said in a note to clients recently via CNBC:

“[…] we suspect we could even see a retest of the $1,921 record high, [with a multiyear base that could provide for a] significant and long-lasting rally”

Will Gold go higher? Maybe. Is the chance it goes higher about the same as Cocoa, or Natural Gas, or Chinese Rebar futures. Yes. It isn’t a panacea for all that’s wrong in the world and bloated Fed balance sheets and all the rest. If it were, it would be at $10,000/oz by now given all the Fed meddling in markets, negative interest rates in Europe, Chinese capital controls, and so forth.

We prefer to think of Gold as a historical relic, from a time gone by when currencies were tied to it, and Bond super-villains killed in the name of it.

Photo Courtesy: James Bond Wikipedia 

PS – there is a great piece on Slate’s Blog MoneyBox delving into the economic and political undertones of the famous James Bond Classic: Goldfinger. Was this a classic Bond film with the ejector seat car, or a movie about the Bretton-Woods system of semi-fixed exchange rates restricting British citizens from buying and storing large quantities of gold.

 “…Goldfinger, you see, really liked gold (as the song says “he loves only gold”) [but] the Bretton-Woods system of semi-fixed exchange rates [meant] ordinary citizens couldn’t just own gold. …Goldfinger, being a gold enthusiast, bears little love for an economic policy regime that restricts his ability to obtain it. Thus he isn’t shy about exploiting the arbitrage opportunities that arise under the system…using his industrial permits to obtain gold in Britain and then spiriting some of it off the island for sale in other countries where the price of gold is higher”

We’ll prefer to remember Gold in this light, and for what it’s worth – Goldfinger for the Aston Martin DB5, henchman OddJob, and perhaps the most deliberate use of the double entendre in Bond Girl names; but it’s nice to know there was more to the back story for the movie than just a man who loved Gold.

27 Sep 2019

The return of the AG

We’ve talked recently about African Swine Flu sending the Hog market for a ride, and that’s just the sort of thing we imagined in our 2019 Outlook whitepaper when we talked about the “return of Ag.” There’s been four straight years of volatility contraction for the Ag markets, and there’s a real threat that the increasingly connected global food supply and increase in the volatility of the weather causes some outlier moves in Ag markets.

Enter Bloomberg, with their Pessimist’s Guide to 2019: Fire, Floods, and Famine, a sort of worst case scenario they imagined where record forest fires, bigger and costlier hurricanes, and hotter and longer droughts unfolded into a sort of global nightmare situation with resulting food riots, bread lines, and all the rest.

Here’s the pretend headline from the future they imagined:

“The heat El Niño released into the atmosphere helped push up world temperatures, making 2019 the warmest year on record. The disruption it brought to weather patterns unleashed floods and droughts, sparking forest fires, displacing people, creating food shortages, and upending energy and commodity markets.”

It’s as out there as you can get – and they even admit that maybe it “…sounds far-fetched” before pointing out that “all of the weather scenarios and most of the policy scenarios described here have happened in the past, just not at once.” Bloomberg references case studies throughout the article where situations like this have all happened before – like the 2011 Brazilian Crop Devastation, and the 1993 Japanese Rice Crisis.

Don’t remember those crisis periods as well as the ’07/’08 financial crisis here in the U.S.? Neither did we. So we looked up a couple of these examples to show how the futures prices were moving during these real-life crises.

 

1993 Japanese Rice Crisis
Here’s how Bloomberg described the crisis, and the resulting price chart showing prices nearly doubling:

The coldest-ever summer in many parts of Japan had damaged rice crops. Production was down 26 percent from a year earlier. Japanese consumers needed 2.7 million more tons than was on the market and rice stockpiled in government warehouses was less than 10 percent of that.

To make matters worse, in August there were media reports that harvests were still deteriorating across the nation. Some wholesalers began withholding their stockpiles. Rice prices in supermarkets started climbing. Eventually they would double. Because of hoarding, rice virtually disappeared from store shelves.

macrotrends.net/futures/rice

 

2010 Russian Wheat Export Ban
Bloomberg explains the dynamic inside Russia which caused the resulting price action:

…the government banned export sales of wheat…
A drought in 2010 had slashed the country’s wheat crop to a level barely above consumption. The ban was to ensure the country’s consumers didn’t have to compete with international buyers for the scarce supply. [But] As wheat futures soared on the Chicago Board of Trade, domestic prices in Russia, a top shipper of the grain, slumped.

 

 

 

 

 

 

 

 

 

 

macrotrends.net/2534/wheat-prices-historical-chart-data

 

All of this is to say – commodity markets don’t care how many subscribers were added last quarter, how many cars produced, or what the Fed is up to. Commodity prices move to their own beat – based on things as variable as the weather, a drought, or a poor policy decision. Check out our infographic on what moves commodity prices.

27 Sep 2019

A Hogdiculous Move

Tom’s been telling anybody who would listen about Chinese hog farmers being hit with one of the worst  outbreaks of African Swine Fever (ASF) in the country’s history, and after Hog futures finally caught up to the story – rising over 50% in March as pointed out by TT’s Patrick Rooney – it’s time we hear what’s going on in China.


[past performance is not necessarily indicative of future results]

Who’s Tom? Tom is Thomas Chavez of Alternative Capital Advisor’s Strategic Ag program, who put up a 16% number in March (past performance is not necessarily indicative of future results) based in part on his call on the hog markets, which he believed were underpricing the risk of African Swine Fever (ASF) severely curtailing China’s domestic supply.

We sat down with Tom (he’s also an RCM AP), and got hog heavy into the details:

ASF is highly contagious –as in if 1 or 2 of your pigs shows symptoms, you’ll have to get rid of your whole lot kind of contagious – and there’s no vaccine on the horizon. In fact, Spain was hit with this very same swine fever in 1960 with a slow spread peaking in the 1980s. It took almost 35 years to eradicate the disease in-country, as Spain was finally declared ASF-free in 1995. What we learned from ASF in Spain, is that the disease never presents itself the same, and the effort to eradicate the disease is high. And now, ASF is showing up in the largest pork-consuming country in the world, China.


(Source: Agricultural and Consumer Protection Program)

China accounts for just below half of the world’s pork production and is also the top pork importing country. Basically, China consumes A LOT of pork. (For reference, the U.S. produces ~74 million pigs while China has 450-500 million; also, check out these “high-rise hog hotels” in China).

(Source: NationalHogFarmer)

Some are predicting ASF in China could erase anywhere between 20-40% of pigs in China, which means there will be a HUGE deficit between supply and demand in the country. In America, hog production is highly industrialized, and it’s easy to get an estimation of how something like ASF would affect our hog production and much easier to control the disease, but in China, a lot of hog producers are still mom and pop farmers that live in close proximity to one another, both making it easy for it to spread while at the same time hard to control the sickness and estimate the possible effect.

The price move was the American pig market finally pricing in some of this risk, as China will be pulling from American pig-producers to meet demand. In fact, China already sort of saw this coming as a possibility, as in 2012, China bought the world’s largest pork producer, Smithfield Foods, for $7.1 billion. There are two hog-producers, one on the west coast and one on the east coast, that will be taking approximately 22,000 hogs/per day and shipping them over whole-carcass to China.

American Affect
So how is this going to affect the American market? Well in the short-term, there’s already been a spike in lean hog prices, but we could see a lot of other markets make sympathetic moves. Grains, for example, have been tough in recent times, but the longer and larger the issues are in pigs may be the catalyst to give the ag market the volatility it desperately needs (something covered in RCM’s 2019 outlook). All things being equal the bean and corn market will more than likely be hurting too, big supplies, and less pigs, means oversupply.

(source: Farm Policy News)

 

I always get asked the question of why it was so difficult to position for the trade. And I think the answer there is that there were a lot of bearish fundamentals going on at the same time, like a record supply amount. Hog traders were majorly concerned about big supply & tariffs in China and Mexico cutting off demand for US pork, so you had this sort of classic market fight between big supply and a big (but not yet known how big) demand problem out of China. I think if you were focused on supply only, it was easy to miss the boat. Another issue is that info coming from China is opaque, so it’s hard to trust the data.

Overall, I think this could bring in a wild few years in the ag markets. The long-term impact of this disease could last for years as the breeding her (60 million sows) is being liquidated, which by the way is equal to the entire breeding population in the U.S. This could create a long lasting pork shortfall into 2020.

It’s not sexy to trade pigs in today’s world of AI and risk parity and the like. But it’s just the type of market that an event like this can give traders the volatility their programs are craving. IN my opinion, this illness is going to affect grain, cattle, chicken, and more. It’s going to make the market swing up & down and it’s an exciting time to be involved in those markets on behalf of clients.  – Tom Chavez, Director

27 Sep 2019

Crude Traders…. Remember the Middle East?

Like a Fresh Prince of Bel Air flashback from the early 1990s, middle east violence and geopolitical fears shot back into commodity traders’ lexicon recently – with Oil spiking nearly 20% on news there was a coordinated drone attack against Saudi Arabia’s oil infrastructure. The fantastical headlines by the likes of CNBC followed shortly after:

“Brent crude oil spikes the most in history after Saudi attacks”

Cooler heads sort of prevailed by mid-day, but energy futures markets were still much higher.

Here’s what managers and trader’s we’re speaking with are thinking of the move:

  1. One, the headline about oil spiking most in history is a little bit of a sleight of hand, as it was only on Brent and only on a percentage basis. A 20% move is nothing to shake your head at, to be sure – especially when it is on a Sunday with markets closed. But WTI has had  $15 moves when jumping around above $100 back in 2007/2008, and this doesn’t feel like a Black Monday type of move. It was a surprise, it was big, but it wasn’t that big of a surprise.
  2. The spike was rather short-lived, with markets settling in at about half the initial spike levels ($66 in Brent Crude when spiked initially to nearly $72).
  3. Systematic models generally hate these type of binary moves, and much rather prefer elongated moves where new market prices are established over weeks, not minutes. The move reminded us of the Swiss depeg in some ways in relation to systematic managers and exposure. The Socgen trend indicator is showing that classic trend following models were short coming into the move, but we’re not seeing all that much exposure amongst managers we deal with (as it is a bit more complex on where and when such models get in), and haven’t heard any horror stories about hedge funds with massive short call positions or the like.
  4. This has been mostly a non-event for stock markets, with the US down slightly – but not really caring about the increase in geopolitical risk. The price moves thus far appear to be mainly about supply issues that will be caused by the Saudi’s production going offline. The geopolitical risk seems to have already been embedded, or is being ignored. It doesn’t seem all that long ago when coordinated attacks on Saudi oil supply would have sent the VIX soaring into the 30s and stocks down a few percent. Perhaps people are waiting to see if another shoe drops and things start to escalate… but either way, it all bears watching as the Middle East is back on the radar.

 

 

 

27 Sep 2019

Hogs=one confused market

A few months back we were talking about the “Hogdiculous” market moves created by the African Swine Flu and sending the Hog market into a frenzy.

ASF is highly contagious –as in if 1 or 2 of your pigs shows symptoms, you’ll have to get rid of your whole lot kind of contagious – and there’s no vaccine on the horizon. China accounts for just below half of the world’s pork production and is also the top pork importing country. Basically, China consumes A LOT of pork. (For reference, the U.S. produces ~74 million pigs while China has 450-500 million; also, check out these “high-rise hog hotels” in China).

We were noting back in April that ASF in China could erase between 20-40% of pigs in China, creating a huge deficit across the country, and additionally affecting the American market through the Hog and Corn markets.

Fast forward 5 months – and there’s a bigger delay in the hog rally than we had expected, leading to a near full unwind of that Higdiculous move. Talk about buying the rumor and selling the news.

Expectation Vs Reality

(chart via MarketsInsider)

 

So what news are traders selling. Well, per National Hog Farmer (there really is a website for everything):

Producers in China have been moving animals to market in panic type fashion for fear of experiencing an outbreak. This has contributed to overproduction and contributed to the placement of huge amounts of pork into frozen storage. Second, it appears that China was holding far more pork in frozen storage than anyone realized. They’ve been pulling aggressively out of storage for a couple of months, again further delaying the acute production shortage that I expected to develop months ago….A major move upward in U.S. Hog prices will occur, likely at some point next year. (National Hog Farmer)

This is advanced supply/demand economics going on. There’s likely to be a shortage of pork – but before we get there, there’s likely to be an abundance of pork, because they are slaughtering pigs to eradicate the disease (and you can eat the pigs with the disease – no thanks, but they are in China).  Throw the tariff equation (or lack thereof) on top of all this, with the possibility that American farmers won’t even be able to sell their pork into China in the midst of a once in a lifetime shortage there, and you have one confused market.

Stay tuned.

27 Sep 2019

This is what Non-CORNellation looks like

It’s been raining a lot here in the Midwest this spring. Like, only 5 little league games have actually been played instead of 15 scheduled, a lot. For most of us, that means some severe weather, tornado threats, and flooding.  But for those who plant the world’s Corn and Soybean crops in the Midwest, that means problems getting that crop in the ground. How bad? The USDA is reporting that the Corn crop is only about half as planted as it typically is for this time of year, with Corn about 58% planted versus 90% at this time last year. Here’s the state by state breakdown showing just how much Corn has been planted via Agweb.

And a big reason for that is because of this:

We touched on this planting issue as it related to the China trade war and tarrifs, but Corn in particular has been on a tear the past few weeks as fears of supply issues and the inability of farmers to get the crop planted has mounted. If you can’t get it planted, you can’t grow it, and you can’t harvest it – meaning there will be less Corn. Here’s the hourly chart showing Corn advancing by about 15% over the past month.

Now, you may be thinking who cares – they’ll just plant the Corn a little later and everything will work out OK. But as one of RCM’s AG specialists, Jody Lawrence, points out –  the farmers are running up against time here. One, you can’t just plant the Corn as late as you want, as it takes pretty much a set time to grow and the later you start, the later you’ll finish – meaning you’ll have potential frost issues and problems getting the crop out of the ground the later into the fall you go. Second, there are deadlines that have to be met in order for farmer’s to qualify for prevented-plant insurance -which pays out when farmers are unable to sow crops at all.  Here’s Jody:

Over the weekend we passed the first set of prevent plant dates for corn in the WCB on Saturday the 25th with another round this Friday the 31st and then the last date next Wednesday June 5th. With unfriendly forecasts into late next week and 42% of the forecast corn acres (39 MA) and 71% of the bean acres (61 MA) still needing to be planted and most soybean PP dates around June 15th, the outlook is not good. Growers have about a week to decide whether to plant their Corn or lose the ability to claim the insurance.

Who cares?
Well,  the farmers for one. And the grain companies and ethanol plants and anyone who needs to feed some livestock, secondly. But bringing it back to the alternative investment world – there’s a few 100 billion of dollars in Ag Trading CTAs and quant hedge funds which track things like Corn prices that have been waiting a long time for a move like this. We highlighted the lack of such volatility in the past few years in the Ag space in our 2019 managed futures outlook, and even predicted an increase in AG volatility being one of the potential drivers of managed futures and alternative investment performance in 2019.

It sure seems like we’re seeing an increase in volatility in the weather, which is one of the biggest price drivers of Ag prices. Record forest fires. Bigger and costlier hurricanes. Hotter and longer droughts, and so forth surely must cause… [some sort of reversal of] the declining volatility environment of the past several years.….it wouldn’t surprise us at all to see the smaller Ag markets awake out of their long slumber to add to the equation in 2019.

Which all leads us to commodities markets non-correlation with the stock market. Things like a freak blizzard causing an up trend in cattle prices, a swine virus breaking out in China, and record rains in the Midwest simply aren’t part of the stock, bond, interest rate world. Prices aren’t rising because of a good consumer confidence number, earnings report, or interest rate decision. Prices are rising because there are millions of acres of Corn yet to be planted and at threat of never getting planted (economics 101 = supply down, price up). In more sophisticated vernacular – the two markets have different price drivers, and the price driver for Corn is about as far away from the price drivers for the stock market as you can get.

26 Sep 2019

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