Monthly Archives: September 2014

Corn & Soybean Harvest Progress, Wheat Plantings

USDA Reports Corn Harvest at 12% Complete: The USDA left their crop conditions “unchanged” for the week.  The “harvested” number being reported at just 12% complete was a bit less than what most seemed to be looking for (closer to 15% harvested).  However, as many of you know the moisture levels have simply been too high.  To be a bit more specific, the USDA reported 60% of the corn crop as “mature”.  The states still struggling are as follows: ND just 30% mature; MI & WI 36% mature; MN 45%; SD 48%; IA 58%.   

USDA Raises “Good-to-Excellent” by +1%, Harvest at 10% Complete:  

USDA Report Winter Wheat Planting at 43% Complete: 

Why Some Are Spooked About A Possible “Reversal”

There was a lot of talk circulating in the market this week about a possible “reversal.” Not just in stocks but perhaps commodities as well. For some odd and strange reason, blame it on the stars, the moon or ocean tides the period of time surrounding Sept 22nd makes many traders a bit nervous. Back in 2009 Barron’s editor Randall Forsyth, who cites work by Paul Macrae Montgomery, wrote a bit about this phenomena and the propensity for this period of time to be tied to major market moving shifts or “reversals.” Below is his note on the subject (Source: Business Insider)

Montgomery recalls living through the October “massacres” of 1978 and 1979, the crash of 1987, the mini-crash of 1989, the 1997 Asian collapse and the Long-Term Capital Markets plunges, which started to cascade downward in late September. And while gold bullion topped in January 1980, gold stocks made their highs on Sept. 22 of that year, he adds. That date also saw the peak in many oil stocks.

Looking back farther, on Sept. 22, 1929, the Dow Jones Utility Index became the final major average to make its high before the Great Crash. And in 1873, a panic forced the New York Stock Exchange to shut down, Montgomery further details.

And who can forget 2008, when markets went into free fall in the days following the collapse of Lehman Brothers? What’s remembered less well now is the market chaos in the subsequent days after the House of Representatives initially rejected legislation that created the Trouble Asset Relief Program.

Currencies have seen historic changes around this date as well, he adds. The British pound was taken off the gold standard and was devalued a huge 28% on September 21, 1931. Exactly 54 years later, the Group of Five produced the Plaza Accord, which brought a sharp decline in the dollar and expansion of global liquidity. Black Wednesday, when Britain was forced to withdraw from the European Exchange Rate Mechanism, came a few days early on Sept. 16, 1992.

I also recollect that Treasury note and bond yields made their historic highs in late September, 1981, with shorter maturities hitting 17% and long bonds reaching 15%. That marked the end of a 35-year bear bond market from the end of World War II.

What You Need To Know Right Now About The New Farm Bill

I wanted to share with you some of the things being passed around in regards to preparing yourself for the new farm programs to be instituted from the 2014 Farm Bill. From what I understand, we should have some concrete answers by late 2015/Early 2015. While we wait, producers and landlords should be aware that there are actions that should be taken now to prepare for the decisions that must be made during the coming months. The 2014 farm bill includes three decisions that farmers and landlords will be required to make in 2014 and 2015:

  1. Updating Program Yields: Owners will be permitted to update their program yields based on the farm’s actual production yields from 2008-2012.
  2. Reallocating Base Acres: Owners will be permitted to reallocate their base acres based on the farm’s actual planted acreage from 2009-2012.
  3. ARC Programs versus PLC Program: The Direct and Countercyclical Payments that were used under the 2008 farm bill have been eliminated. Producers will be permitted to choose between the new Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC) programs that replaced the DCP program.

There are still a lot of details that have yet to be announced, including final timelines, but it is a good idea to go ahead and start collecting information for these decisions now. The general timeline I am hearing is that owners will have an opportunity to update program yields and reallocate base acres during the late summer and fall of 2014. Decisions on the ARC/PLC programs are likely to be required during late 2014 and early 2015. As far as the “Reported Commodity Crop History Summary” letter that the FSA sent out back in August, this information will be key in making decisions for 2014 and 2015. According to the Michigan State University Ag Extension, owners and producers should take the following steps as soon as possible to prepare for the new farm bill:

  1. Review the FSA letter and Reported Commodity Crop History Summary and inform FSA within 60 days of the letter’s date if the information is incorrect.
  2. Begin now to collect information on the farm’s actual planting history during 2009-2012 – how many acres of each crop were planted on the entire farm during each year from 2009-2012?) and the farm’s actual yield history (what was the yield per acre for each crop planted on the entire farm during each year from 2008-2012?). Evidence from all sources (sales receipts, crop insurance records, etc.) should be collected retained (NOTE: FSA has not yet announced the rules regarding the information required for program decisions. Consequently, all information that could prove helpful in proving actual planted acreage or actual yields could be helpful).
  3. Communicate with your tenants and/or your landlords. The upcoming decisions will affect the program benefits that a farm collects during 2014 to 2018. All parties have a common interest in making the best possible decisions for the farm, so good communication and cooperation between landlords and tenants will be beneficial for all parties involved.
  4. Stay informed about the upcoming deadlines for decisions in late 2014 and early 2015. Read all emails and newsletters from your local FSA office and consult with your local FSA office and with your tenants or landlords about these decisions.
  5. Be patient but be alert. The farm bill was passed by Congress and signed by the President at a relatively late date, and the FSA has a major challenge in implementing the new programs in the 2014 farm bill. Landlords will need to become informed about program options and key deadlines and cooperate with tenants. Tenants can often have numerous landlords that they will need to consult and enrollment dates could fall during peak work periods. The new programs are likely to require some complex decisions in late 2014 and early 2015. Landowners and tenants should stay informed about program deadlines and program options to cooperate in the best possible decisions for each farm.

Chinese Soybean Demand Has Been Good…But?

With the Chinese having already booked a heavy dose of their upcoming soybean demand many are arguing the current USDA estimate of 74 MMTs needs to be moved decisively higher. Be careful buying into this rhetoric as there is some concern a major lull or lack of demand news could hit the market in the coming weeks. Also keep in mind the possibility of the NEW ports in northern Brazil opening up in 2015 which would give the Brazilians a very big boost in their ability to get corn and soybean supplies out of their country.  For more info on the NEW Brazilian ports I encourage you to read the detailed 2014 USDA Foreign Ag Services report in full by click HERE). Lets also not forget the Chinese National Day holiday, a week long celebration, will bring China to an almost standstill between Oct 1-7. Remember, “Golden Week,” as its often called is the longest public holiday in China besides the Spring Festival holiday. My point is, yes Chinese demand has been strong early in the marketing year, but things might start to slow a bit as we progress further into the winter months.   

Corn & Soybean Harvest Progress

A Deeper Look Into The Harvest Data:  As you can see from the graphic ALL of the major US corn producing states are running behind their traditional 5-year harvest average. Based on the 5-year numbers… IL would generally be 23% harvested; IN 13% harvested; IA 9%; KS 33%; KY 44%; MN 5%; MO 36%; NE 9%; NC 73%; OH 5%; TN 56%.  The trade however doesn’t really seem to mind since there is no significantly cold weather in the forecast for the next couple of weeks.

The USDA actually lowered their weekly soybean conditions by -1%. The problem is they still have 71% of the crop rated “Good-to-Excellent,” compared to just 50% last year and 54% for the 5-year average. The biggest setbacks occurred in TN -5%; MN & MI -2%; NE & MO -1%.  Similar to corn, the soybean crop can still be considered a hair behind our traditional pace.  The USDA reported harvest at 3%, which is the same as last year, but behind the 5-year average of 8%.

What Does A Strong US Dollar Mean For Markets?

Traditionally a strong dollar has been bullish for the stock market. Since the late 1970s, the stock market has actually performed twice as well during dollar bull markets than during dollar bear markets. I should however point out there are some additional questions being raised this time around in regard to the US dollar possibly losing its reserve currency status? I’m not particularly in this camp (at least not any time soon), but we need to recognize the powers that be in other areas of the world are desperately trying to debunk the US dollar as the world’s global currency. Remember, back at the end of August, Gazprom (who is the Russian equivalent of ExxonMobil), announced it would be accepting payment for its oil in Rubles & Yuan…NOT US dollars! Obviously the US dollar will not fall from the leader board overnight, but there are certainly those in the trade who are becoming much more concerned about a longer-term transition from power. For now the US dollar remains in the midst of a major bull run and I suspect it will continue. Below are some reasons why and what the rally may mean for your investments:

  • Several Reasons Why US Dollar Is Strengthening… Improving US economy; Fed moving toward monetary normalization (no more QE) while other global central banks—notably the European Central Bank (ECB), the Bank of Japan (BoJ) and now China are aggressively easing policy; Thoughts of increasing US interest rates attracting more investment dollars; US energy renaissance means improving US trade and account deficits.
  • Benefits of a Stronger US Dollar: Lower import prices (cheaper oil, autos, etc…) equating to more discretionary spending power; Foreign travel and land purchases become cheaper for Americans.
  • Negatives of a Stronger US Dollar: This is a tough environment for US farmers because it lowers commodity prices (particularly those priced in dollars). As the dollar appreciates, commodities become more expensive for overseas buyers since they have to convert their weaker currencies into dollars, which basically works to curb or slows global demand. As you can see this makes US exports more expensive and less competitive in foreign markets. Short-term, there is some concern that third and fourth quarter corporate earnings could be hurt a bit by the dollar’s recent surge.

Interesting Perspective

I wanted to pass along some interesting thoughts from a good friend of ours, long time subscriber and professional trader.

Kevin,

I also reduced some of my short side hedge exposure this week. Like you, I’m not saying the low is in place, I’m just wanting to bank a portion of my profits and reduce my short-side risk. I’m also a little fearful we may experience a (new-crop 2015) rally back towards $4.00 in the Spring, especially if the market feels it needs to buy a few corn acres. If you consider the “BIG picture,” we had a 1.8 billion bushel corn carryout last year at this time and we were trading around $4.40. This year we are at 2 billion bushel carryout and a whole buck lower at $3.40. Yes, old-crop stocks were tighter last year and some of those wild feed usage numbers were to “restock” the pipeline, which was obviously lower than they (usda) were admitting last fall. Therefore its easier for the bears to argue this year it’s going to be tougher to reduce the carryout. On the flip side, we now have to grow 12-13 billion per year JUST TO MEET demand. That’s a much taller order to fill vs. the 6-7 billion annual consumption during the 1980’s. I’m not telling you anything you don’t already know, but simply I have become a little more careful when comparing current supply numbers to those of the past, especially “percentage wise.” The implications of production and or supply hiccups can become much larger concerns or “real” problems much faster with today’s annual consumption. The market is counting on a 13 billion crop minimum to meet demand and gets pretty nervous at the first hint of problems. Let’s also not forget the overall speed of the trade and how quickly information now travels.

CALPERS Parting Ways With Hedge Funds

CALPERS (California Public Employees’ Retirement System) has decided to completely pull out of hedge funds, announcing they’ll be divesting all $4 billion they have invested because they are too complicated and their fees are too high. A few months ago, they cut hedge fund investments by 40% for the same reasons and saying they were looking to get back to basics. That was in July, so this decision to cut the other 60% of their hedge fund program so soon afterward is kind of unexpected. CALPERS is the largest pension fund in the US and the fifth largest in the WORLD with nearly $300 billion in assets. They currently have investments in 24 different hedge funds and six fund-of-funds, in which they earned returns of 7.1% in their fiscal year that ended on June 30. In turn, they paid a total of $135 million in fees to those funds. CALPERS aims to average a fiscal return of 7.5% and says that for hedge fund investments to have a material impact, they would have to increase fund holdings to at least 10% of their portfolio, which they say isn’t possible when considering their complexity and cost. CALPERS certainly isn’t the first to express concern over how high hedge fund fees are, which usually operate on a “2 and 20” model, meaning they charge 2% of of total assets and 20% of profits. These fees seem even more unreasonable in light of recent hedge fund performance, which returned on average just 9.1% in 2013, compared to the S&P 500 which increased 32.4%. CALPERS originally turned to hedge funds back in 2002 after the global financial crisis erased more than one third of their value. Returns at the time helped them meet the costs of retiree benefits. Over the last ten years though, their annual hedge fund investments have only returned an average of 4.8%. The hedge fund industry has already started weighing in to defend itself, putting the blame squarely on the shoulder of CALPERS, saying they just didn’t pick good funds. One hedge fund manager told Business Insider, “They got what they paid for since they only invested in managers who would cut fees. So the best funds wouldn’t do that, so they had a mediocre portfolio.” Some managers also argue that those who are critical of hedge fund performance aren’t taking into account their ability to manage assets during down market cycles. While CALPERS $4 billion withdrawal is just a drop in a bucket to the total $2.8 trillion in assets that hedge funds currently have under management, the bigger worry is that other pension funds might follow. Considering CALPERS sheer size, it is only natural that other pension funds look to them for direction, which could be a very bad thing for hedge funds in this case.

Corn Harvest Moving North

The graphic below shows how the US corn harvest is progressing. As you can see, the states in “red” are running behind our traditional 5-year average. I suspect in the next two to three weeks we start to more aggressively close the gap.

CornHarvested(580)

Must Read…Are We Missing Something?

I realize this might sound a little nuts, especially in light of all the bearish commentary, but I’m starting to get the feeling we should be lightening the load and start banking the hedge profits we have realized on the short side.  There are a few things I’ve learned through the years about the markets.  The first is the fact the wheels tend turn the fastest towards the bottom of the hill.  Next is the famous line by Mark Twain, “Whenever you find yourself on the side of the majority, it is time to pause and reflect.”  And of course, one of my all-time favorites…”Every loser in Vegas always leaves the casino thinking he could have done just a little bit better.” I’m not saying the bottom is in place or that we are even within sniffing distance, I’m simply not that good to predict the exact low.  Our original plan was to protect against a fall in price to the $3.50 level and that’s exactly what we’ve done.  The Chinese announcing a new economic stimulus package on the heels of the EU stimulus announcement a couple of weeks back has me wondering if I’m missing something much bigger…  As I sit here today I personally don’t see any major risk or headline that would drive prices dramatically higher for an extended period of time, but then again, GOOD “risk-management” is more about what we DON’T know or see coming our direction than what we do know. In fact that’s truly what we are trying to protect against!  With this being said, I believe the greatest “unknown” has now shifted to the upside…not the down. In other words most ALL of the bearish cards are in clear view and on the table. Therefore I’m making the move to start lightening the load and unwinding the hedges.  I suspect the absolute lows come at some point between now and year-end.  In other words the low comes within the next 45-65 trading days.  As I mentioned above, I’m not nearly good enough to pick the exact day for the exact low, so I’m starting my scale-out process now. Those who are keeping an extremely close eye on their short positions might be able to count to “10 Mississippi” before starting the scale-out process, just don’t get overly greedy! Keep in mind this does NOT mean I’m going long or have become bullish the market, nor does it mean we are exiting ALL of our short hedges.  I just think its time to start more aggressively banking your profits and moving to the sideline.