Monthly Archives: November 2014

Why “Leather” Prices Keep Moving Higher

Most of us are well aware of the tight cattle supplies which have led to record high beef prices over the last year. If you haven’t bought a new pair of shoes lately, you may not have noticed how high the price of leather goods has climbed as well. Wholesale hide prices are up around 17% this year. That’s on top of the 17.4% increase seen in 2013. Heavy native steer, the predominant hide type, is now selling at the highest levels seen since the government began tracking it in 1998. And it’s not just high-end leather that’s skyrocketing either. The price of splits – which are used to make suede or coated to make sports shoes – have also climbed to record levels. And here’s the really cruel twist to leather goods producers – as their costs continue to climb, so does demand. As the economy has improved, consumers are once again splurging on everything from fancy bags to luxury cars decked out with leather interior. With producers margins being so high, they’re unfortunately not reaping much reward in the end. The Scottish Leather Group is a classic example. They reported an 18% gain in revenues this past fiscal year, but their hide costs were up 16%, eating up nearly all their profit. Beef prices have a little bit of a buffer when it comes to adding weight, which has been able to somewhat offset the supply shortage. Hides however ​see no gains from the added weight. About half of all global leather supplies are used in footwear; another 30% is used for furniture or auto interiors; and the rest is used in wallets, belts, bags and other accessories. So far, wholesalers and retailers alike have been less shy about passing on the additional costs to consumers than grocers have. Various industry groups estimate that prices at the retail level have been raised anywhere from 10% to 20% and again, that is on top of price increases seen in 2013. They also predict that prices at all levels will continue to climb for at least the next year, if not longer.

Be Careful With The Chinese Internet Stocks

Momo is the latest Chinese tech-company you’ve probably never heard of that has plans to list its stock in the US. From what I have seen, Momo has over 180 million registered accounts, with more than 60 million being considered active monthly users and more than 2.3 million paying subscribers. In fact Momo is now estimated to be the second most popular social app in China, after “WeChat.” The company launched in 2011 as a location based instant messaging application, which basically allows users to chat with others that are in their general vicinity. Momo describes itself as a service for people to meet other users with similar interests, allowing people that are at the same party or nightclub to basically “hook up.” Whether that is just strictly a platonic match or not is highly debatable. The Chinese government earlier this year linked the app to possible prostitution in a widespread crackdown on “inappropriate” material on the internet. Some popular overseas apps like Viber and Line were actually banned by the Chinese authorities. Remember, this country’s far-reaching censorship laws are constantly evolving, with no forewarning as to what their next crackdown may be, which could prove problematic for Momo or other high-tech web based companies in the future. Of course, the recent crackdown could have just been one of many cleverly disguised protectionist moves by the Chinese government, which are really designed to eliminate foreign competition. It’s not clear how Momo was impacted by the legislation, but “WeChat” did end up having to remove 20 million accounts that had ties to obscene and/or fraudulent content. Chinese tech stocks have done well on US stock markets, but you have to wonder about the future of social networking companies to some degree. There are hundreds – possibly thousands – of them now. It’s almost impossible to keep an accurate tally. They seem to pop up as quickly as they disappear. I’m also worried about Chinese government censorship, and how quickly it can change the entire game. All I’m saying is be careful. Even though the excitement surrounding the potential in China is enticing, make certain you are considering ALL the possible risk scenarios. Always remember, “the return of your money is more important than the return on your money.”

China and Australia Ink New Trade Deal

If you hadn’t heard, Australia completed a massive free trade deal with China. The two-way trade deal was driven by China’s incredible appetite for natural resources and energy, while Australia is looking to buy cheaper manufactured Chinese products. Negotiations on the trade deal began back in 2005 and stalled under the previous Labor government. I am told once the Australians voted in Tony Abbot in 2013, he imposed a target to sign a deal with the Chinese by the end of this year. The Trade Agreement is the third that Australia has reached this year following agreements with both Japan and South Korea. Looks like Australia is making some big headway in regard to foreign trade. Under the new deal, China has agreed to:

  • Coal import tariffs and higher duty taxes that had been imposed on Australian coal are going to be lifted: the coking duty will be cut to zero and the thermal coal duty to 4% from 6%…then phased out in the following two years.
  • Agricultural exports from Australia including beef, most grains and seafood will see import tariffs cut to zero between now and 2021.
  • Private Investment is being accorded to the Chinese at the same threshold as US and Japanese. This means proposals of as much as A$1 billion will not require Foreign Investment Review Board approval. The key issue of investment by China’s state-owned enterprises has been deferred in order to get the deal done.

Overall, China wants greater access to Australia’s natural resources, while Australia wants greater exporting opportunities for sugar, rice and other agricultural exports. The problem is this new bond with Australia will eventually put more pressure on US exporters. It’s not yet clear just how much of an impact this deal will have on US grain exports to China. What is clear is that this deal solidifies already deep trade ties between the two nations. Australia is already the most China-dependent developed economy in the world, with exports to the Aussie nation accounting for 5.3% of their GDP. Last year alone, China supplied A$205 of Australia’s A$256 billion of imports and bought more than 35% of their exports. Personally, I’m happy to see our friends down under inking the deal, but it simply reiterates the fact China is branching out and looking for more partners and providers of natural resources. (Source: Bloomberg)

Are US Producers Selling Their Soybeans?

This is another interesting note I received this week from one of our trusted readers….

Kevin,

The note from Cargill Cedar Rapids on Tuesday was that beans had about a 4 hour line to dump but they would be open every day thru Sat. Yesterday morning I received a note that they were amending their hours and were now going to be closed Thursday and Saturday. Makes me believe they got a ton of beans dumped on them??? I also wanted to let you know the corn basis has improved greatly. ADM Clinton now paying +5 over from just -10 under during harvest. The plant we go to in Dyersville, IA went from -23 under to -5 under and I think will be flat soon. Flint Hills has 3 plants down the road and paying “even” the board. Basically everyone is trying to get corn ownership. Lets hope the farmer has more staying power and the basis continues to strengthen. I hear the bigger banks are most concerned about overall “debt concentration”. Meaning, for the most part, farmers are in good shape, but perhaps some of the BTO’s are carrying too much debt to sustain an extended bearish run. Obviously, if these bigger operators find themselves too overextended it could free up a lot of acres in the next 18-24 months. The way the Fed’s maneuvering, our landscape could change in a hurry. Should get

interesting

Corn & Soybeans Left To Harvest

How Much Corn Is Still In The Field? The USDA now reports the US corn harvest at 89% complete, which is actually ahead of our 88% 5-year average. I wanted to shift things up a bit in this weeks graphic. Rather than showing the percent harvested, I wanted to show what we think might be left out in the field.  The numbers below represent how many million bushels of corn might still be left in each state. This is obviously a simple elementary guess based on the precent of ground the USDA is estimating still needs to be harvested and the USDA’s most recent state production estimate. As you can see, there’s still probably some 1.0 to 1.5 billion bushels in the field.  According to the USDA Michigan still has 41% left to harvest; WI 36% left to harvest; PA 21%; OH 19%; CO & IN 16%; ND 15%; MO & NE 9%; IA & SD 8%; IL 6%; KY & MN 5%; KS 4%; TX 3%; TN 1%.

How Many Soybeans Are Still In The Field? The USDA reported the US soybean crop, as of Sunday, at 94% harvested compared to 90% last week and 96% on average. Similar to corn, I wanted to shift things up a bit in this weeks graphic. Rather than showing the percent harvested, I wanted to show what we think might be left out in the field.  The numbers below represent how many million bushels of soybeans might still be left to harvest in each state. This is obviously a simple elementary guess based on the precent of ground the USDA is estimating still needs to be harvested and the USDA’s most recent state production estimate.  As you can see, there’s probably only some 200 million bushels still out in the field.  According to the USDA North Carolina still has 47% left to harvest; KY 25% left to harvest; MO 19%; TN 17%; KS & MI 8%; IN, OH & WI 7%; IL 5%; AR 4%; MS 3%; IA 2%; MN 1%

Looking For That “Silver Lining”… Be Careful!

Like many of you, through the years I’ve become a long-term buyer and accumulator of physical silver. It started in the late-90’s as an investment idea, but as of late (with falling prices) I’m going to start calling it a “hobby.” Up until 2007 I was slowly building my collection with prices well below $10 per ounce. Not only was I looking at silver as longer-term hedge against a potential collapse in the US dollar, but more importantly silver’s increasing usage as an industrial metal. Everything about my investment was moving along as planned, then in 2008, slowing global economies dropped the industrial demand for silver by about 25%. Basically, as investment dollars and consumer purchases in auto, solar and electronics fell, the price of silver was cut in half, from just above $20 an ounce to below $10 an ounce in the blink of an eye. Once again I was a small buyer on the break. This proved to be a smart play as prices quickly rebounded and eventually surged to a high of nearly $50 per ounce in the spring of 2011. The problem is I’ve never pulled the trigger and made any sales. In fact I was a small buyer again in the summer of 2013 when silver prices first pulled back below $20 per ounce. As I sit here now I’m thinking I should have waited for another pullback to below $10. There’s article after article circulating in the trade right now about how The U.S. Mint has ran out of American Eagle silver coins. Bloomberg recently reported in October U.S. Mint sales jumped 40 percent to 5.79 million ounces from a month earlier to the highest since the record in January 2013. The Royal Canadian Mint is also reporting a massive jump in consumer purchase. In other words, everyone believe Silver prices are drastically oversold and way too cheap. My question is, when’s the last time the investment public was correct in their thinking? Yes, I know that the “gold-to-silver” ratio is supposedly all out of whack and silver is the hidden gem. But as the US dollar looks poised to continue its surge to higher ground and “deflation” rather than “inflation” plays the lead-role, the price of silver may continue to struggle. ​W​ith this in mind, I’m choosing to sit this so called perfect investment buying opportunity out. Simply said I’m going to wait for even lower prices before I add any additional pieces to my “collection.” I’m also going to try and convince myself and my wife that it’s more of a “hobby” than an “investment”… it just feels so much better:) Below is a 25-year continuous Silver chart (source: Barchart.com). As you can see we’ve spent a lot of time in the sub-$10 range.

USDA November Supply & Demand Results

USDA Highlights – In a somewhat surprising move the USDA elected to lower their US corn yield estimate from 174.2 down to 173.4 bushels per acre.  Corn acres left “unchanged.” Corn exports as well as feed and residual were left “unchanged.” Corn use for ethanol was raised by 25 million bushels. Food, seed and industrial was raised by 5 million bushels as well.

 Soybean yield raised slightly from 47.1 to 47.5 bushels per acre.  US soybean acreage left “unchanged”. Soybean exports raised higher by 20 million bushels.  Soybean crush raised higher by 10 million bushels. Residual raised by 1 million bushels.  Net-net no change in the 450 ending stocks estimate. 

Wheat crop (US) lowered by 9 million bushels as yield and harvested acreage is reduced. 

Global Changes:     

  • Chinese corn crop lowered from 217.00 down to 214.00.  At the same time they lowered Chinese corn imports from 3.00 down to 2.50 
    • Ukraine corn production raised higher by 2.0 MMTs 
    • EU corn production raised higher by 2.03 MMTS  
    • Argentine & Brazilian corn production left “unchanged” 
    • Argentine & Brazilian soybean production “unchanged” 
    • World soybean production raised from 311.20 to 312.06
    • Australian wheat production lowered from 25.0 to 24.0
    • Kazakhstan wheat production lowered from 12.50 to 12.0
    • EU wheat production raised from 153.98 to 155.40  
    • Russian wheat production left “unchanged”  
    • World wheat production lowered from 721.12 down to 719.86 
USDA’s NOVEMBER Supply & Demand Worksheet

US 2014/15 Production (In billions of bushels and per-acre yields)

 
USDA Nov. 
Avg. Estimate
Range of Estimates
USDA Oct.
USDA 2013
Corn Production
14.407
14.551
14.242 – 14.842
14.475
13.925

Corn
Yield

173.4
175.233
171.40 – 178.60
174.2
158.8
Soybeans Production
3.958
3.976
3.903 – 4.064
3.927
3.358
Soybean Yield
47.5
47.608
46.80 – 48.70
47.1
44.00

US 2014/15 Ending Stocks (In millions of bushels)

 
USDA Nov. 
Avg. Estimate
Range of Estimates
USDA Oct.
Corn
2.008
2.135
1.850 – 2.282
2.081
Soybeans
0.450
0.442
0.403 – 0.513
0.450
Wheat
0.644
0.660
0.634 – 0.682
0.654

World 2014/15 Ending Stocks (In million metric tons)

 
USDA Nov.
Avg. Estimate
Range of Estimates
USDA Oct.
Corn
191.5
190.77
185.60 – 194.18
190.58
Soybeans
90.28
90.37
89.50 – 92.55
90.67
Wheat
192.9
192.15
189.79 – 196.40
192.59

 

Personal Thoughts On The Evolving Market

Personal Thoughts: My last cash soybean sale at $10.45 felt for a brief moment to be an extremely smart play, now it clearly appears to have been nothing more than a premature-sale. Probably what I’m most upset about is the fact I didn’t act on my instinct and purchase the “strangles” 30-45 days ago when the “vol” was low and prices were trading at the low end of the range.  From my perspective that’s been somewhat “easy-money” the past few years with the Quant’s, Algo’s and HFTs in the game.  Something similar in todays marketplace might be going out and  buying the JAN15 $80 WTI Crude Oil Calls and at the same time Buying the JAN15 $75 WTI Crude Oil Puts.  Rember, in buying the “strangle” your not trying to predict direction, but simply betting the market doesn’t trade in a sideways channel. Right now it would cost you about $3,000 to make the play, obviously having been much cheaper when the “vol” was lower.  What I’m trying to point out, and something we have to understand, is that many of the players in todays marketplace strive on extreme volatility, many the traditional rules have changed. Below are a couple of lessons I’ve learned:

Know the Rules of the Game – More specifically know the “unwritten” rules of the game.  When these rules change all prior knowledge and understanding about the game has to be modified.  When the NFL changed the “pass interference” rule, head coaches quickly starting adapting and making changes to the routes their receivers were running.  At the same time defensive back coaches started changing the techniques they were teaching.  Same thing has happened in the investment world. With you being the head coach of your own investment portfolio or farm marketing program, you have to recognize the new written and unwritten rules and the NEW way the game is being played. This clearly dictates the need for new strategies and new techniques being implemented on your end.

Size No Longer Matters – The markets being similar to sports have become more about “speed” than about “size.” As my coach always said, “It’s not the big that eat the small, but rather the fast that eat the slow.”   If “speed” has truly become the edge, then you have to believe extreme volatility gives those with speed and the ability to most quickly change direction the decisive advantage.  Moral of the story, be careful being extremely long or short when the market reaches extreme levels. Remember, there is still a large amount of “financial” money at play in the commodity markets.  How much froth and and unpredictability is that creating in the marketplace, I don’t think anybody really knows?

Corn & Soybean Harvest, Winter Wheat Conditions

The US corn harvest is now reported at 80% complete and back on pace with the 5-year average.  Some of the bulls are talking more about “weather” concerns, primarily those concerns that pertain to the 1.0 billion plus bushels of corn that still remain out in the fields of: IA (approximately 435 million bushels still in the fields); MN (about 125 million); WI (about 245 million); and the Dakota’s (about 225 million). The bears on the other hand seem content adding little if any “risk-premium” to the remaining harvest concerns, especially now that we are no longer “behind.” 

WeeklyHarvestedCorn11.10.14(580)

 

 

 

 

 

 

 

 

 

 

90% of a record US soybean crop is out of the field now, compared to the 5-year average of 91%.

WeeklyHarvestedSoybea11.10.14(580)

 

 

 

 

 

 

 

 

 

 

US winter wheat crop appears to have improved a bit from last week as the overall condition rating jumps from 59% to 60% now rated “Good-to-Excellent.”  The crop is also right on track in regard to planting pace and is slightly ahead of schedule in regard to emergence.

WeeklyHarvestedWheat11.10.14(580)

Corn & Soybean Yield Estimates

USDA expects yields to average 173.4 bushels per acre, down 0.8 bushel from their previous forecast. Many seasoned traders will tell you this was clearly unexpected and somewhat bullish news.  They will also tell you when a market fails to rally (as it did yesterday) on a bullish headline, it’s a market that may be headed for more downhill price action.

November1CornYields(580)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The USDA raised the yield by 0.4 bushels per acre. There were really no major changes in state estimates to speak of. We still have record high yields forecast for AR, IL, IN, OH, MO, SD, TN, etc..

November1SoybeanYields(580)