Trading the Prospective Planting Report

 

The March Prospective Planting report by the USDA really
sets the tone for the growing season. The United States is the world’s largest
producer of corn and soybeans and this report basically tells the world what to
expect our production to be. This report will also tell us what we can expect
our crops to be worth on the global market. The importance of this cannot be
overstated and the errors in its accurate prediction have been growing wider
with each year. In fact, this report has produced limit moves in six of the
last seven quarterly reports and it appears that the small speculators may have
bet too much counting on a bullish report.

This first drew my attention on Monday while analyzing the
Commitment of Traders report. Small speculators and managed money, both categorized
as speculators, now hold a record net long position. I was surprised that so
many traders were willing to risk positions heading into such a major report
with only the seasonal bottom to support their efforts. The combined thought of
the pending Prospective Planting report along with a market that has rallied
nearly 13% on the year leads me to wonder how much higher this market can go
without a pullback.

Global demand continues to grow even as we set new annual
production records due to increased acreage and yields. The stock to usage
ratio, which reflects how much we have left in reserve, is currently around
18.5% on the global market. This is a 13-year low. The main reason for this
decline has been surging demand from developing countries. Chinese soybean meal
consumption has increased nearly 300% in the last 10 years to around 48 million
tons annually. This goes back to the very basic and primal desires of a better
diet, better clothes and finally, better shelter. By comparison, China’s
population has increased only 17% over the same period. Therefore, the change
in diets is based on the wants of an economically empowered society rather than
a mushrooming population.

The Chinese story is nothing new. The real question is, “How
do we trade the grain markets around the report?” Morningstar Data for
Commodities now provides a treasure trove of data for market research anoraks
like myself. My work with Morningstar consultant Shiv Arora has unearthed some
intriguing data kernels. The window we analyzed in corn, soybeans and wheat is
the five days pre and post report over the last 15 years. We then broke this
data down into statistical modules that allowed us to determine frequency,
amplitude and validity of the raw data recorded. 

We will start with the soybean market. There is a 60%
probability that the market rallies 2.78% in the five days preceding the
report. Based on last week’s closing price of $13.65 per bushel, we could see
the market above $14 before the report. The post report effect tends to give
back the anticipatory rally and then some. This is a classic case of, “Buy the
rumor. Sell the fact.” Given the large speculative position and the increased
volatility the markets have been experiencing over time, I expect the post
report decline could be much steeper if the small speculators and managed money
should be forced out of their positions.

The behavior in the corn market is just the opposite. It
tends to sell off ahead of the report by an average of 3% with a much higher
degree of certainty of 73%. Savvy traders can use this to their advantage in
anticipation of a post report rally. The corn market rallies an average of 60%
of the time by an average of 7%. These calculations provide us with a
pre-report target buying opportunity around $6.26 per bushel and a post report profit
target of $6.70.

Finally, the wheat market doesn’t derive any benefit from
the coming report. The wheat market averages a 6% decline 63% of the time
before the report and follows that with a post report decline of 2% a little
more than half of the time. The takeaway here is that wheat is best purchased
around a target of  $6.00 after the
report when the market makes its seasonal bottom around the first week of
April.

Next week we will look at some of the fundamental factors at
play in this year’s grain markets like one of the warmest winters on record as
well as the global demand issues. We will recap the Prospective Planting report
and see how our statistical analysis fared.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Gold Demand Will Return

India is the world’s largest consumer of gold. Their gold imports increased 50% in 2011 to nearly 1,000 tons while they produced merely 2 tons. This extreme imbalance between production and consumption means that Indian consumers must buy gold on the global market. The net purchase of nearly 1,000 tons of gold over the last year has placed approximately $60 billion U.S. dollars worth of Indian Rupees on the foreign exchange market. The outflow of Rupees has forced the Indian government to take action to constrain domestic gold purchases as they rebalance their foreign reserves. This has placed their government at direct odds with the culture of their people.

The Indian government has raised taxes to reduce domestic consumption. First they’ve placed a 1% excise tax on all gold jewelry sales. This is in addition to varying the Value Added Tax (VAT) on a state-by-state basis. Secondly, they’ve separated investment quality gold bars and coins from nonstandard gold such as jewelry while simultaneously doubling the import duties on both. Investment quality gold is now taxed at 4% while jewelry, ornaments and other nonstandard gold pieces are now taxed at 10%.

Gold is a primary investment vehicle in the eyes of the Indian public. This is due to the low penetration of and distrust in the banking sector along with centuries of cultural coveting. Gold is given as gifts at weddings, births and religious festivals. Gold is also held as a means of savings, store of value and investment. It is estimated that the Indian public holds more than 18,000 tons of gold worth more than $800 billion U.S. Dollars. This is about twice the amount of gold in Fort Knox and about 25% of the combined holdings of all exchange traded gold funds.

The government’s implementation of these taxes has been met by a massive uproar among the people. The primary response was from the jewelry industry due to the direct financial implications these actions impose. They have implemented a strike against gold purchases over the last week. Industry estimates are that the jewelry industry is losing as much as $200,000,000 per day during this strike. The magnitude of this number reflects the trickle down economics of such a major industry. Shipments are not being handled at the docks. They are not being transported to manufacturing facilities. Smelting plants are not being run. Jewelry is not being manufactured and the inventory on the shelves is being sold at a premium. Meanwhile, employment hours are lost at each step in the process.

The drop in demand on the global market can be seen in the gold market’s decline over the last couple of weeks as this storm has brewed. Gold prices have declined by over 8% in the month of March. The strike is expected to last until March 22nd. I believe that once the strike is halted, we will see money move back into gold as Indian demand replaces a week’s worth of lost inventory.

Most of the decline in the gold market appears to have been small speculators forced out by the market’s decline. The Commitment of Traders data shows that March’s decline has forced out 25% of the speculative position. This is telling as commercial traders have stepped up to buy this drop in the market. The market may continue to head lower from here briefly. However, the typical pattern in a range bound market, which this is, is for small speculators to get too bullish on the way up and too bearish on the way down. This manic behavior plays right into the patient hands of the commercial traders who are buying this decline in the market.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

The Domestic Economy is the Key to Election

Recent polls suggest that as many as 75% of Americans still view the economy as the most important topic in the coming election. Over the last month, we’ve discussed gas prices, unemployment and the deficit and entitlement programs how they relate to the election. The brief summary is that nothing has changed to diminish the significance of these discussions, which also implies that nothing has been done to formulate a solution.The move towards higher gas prices is always the easiest to discuss. It’s common ground we can share with nearly everyone. Much of the run up has been blamed on Iranian oil being taken off of the market due to EU and U.S. sanctions on Iran. This assumes incorrectly, that oil is being taken off of the world market and is creating a global shortage. The truth is actually quite the opposite. Iran has continued to pump oil as fast as it can and has been selling it to India and China who are both using this captive market to build their own strategic reserves. The increased output by Saudi Arabia is therefore placing more oil on the global market than before the Iran sanctions were enacted.

Here are a few gas facts to keep in mind. The current consensus is that gas prices need to move above $5.30 per gallon to force lifestyle adjustment upon the average American. Natural gas produces the energy equivalent at $1.60 per gallon. Gas prices in November of 2008 were around $2.00 per gallon. Polls show that the American people believe the President has some control over gas prices and are unhappy with the way he’s handled domestic energy policy.

The recent unemployment report remained unchanged at 8.3%. We’ve already discussed some of the hidden data within the report structure so, we’ll move on to some practical application in the employment and tax base structure. Small businesses must be given a chance. They represent 44% of total payroll taxes and generate 65% of new jobs. The federal government needs to repeal or modify policies like the new healthcare package and the payroll tax. State and local governments also need to find ways to foster new startups.

Practically speaking, these policies are easier to enact in areas of population growth due to the growing tax base new residents will provide. The tougher question is, “How do rustbelt cities and towns reinvent themselves?” The answer, I believe is twofold. First of all, there has to be an acceptance by the residents that what used to make the city work is no longer a viable option. The auto industry isn’t going to rematerialize in a former version of itself. Therefore, towns like Cleveland have pushed hard to become technology and medical centers. The second prong is to re-educate our children and teach them to prosper economically through learning small business enterprise and entrepreneurship. The basic thesis of a recent book by Jim Gallup, who you know as the CEO behind the Gallup Polls, entitled, The Coming Jobs War, is that partnering successful local businessmen with a growing number of aspiring student entrepreneurs will help show them how to do it. This skill is more important to 99% of all adolescents than learning to hit a curve ball or spike a volleyball or make a three pointer. This shows them how to be successful while engendering strong community ties from one generation to the next. Successful small businesses are desperately needed to help solve our national debt.

The national debt has grown by more than $77 million dollars since I started writing this article and over the last week, by more than, wait a second, I need a bigger calculator, $4,320,792,000 and the interest on our deficit has grown by more than $573,328,000. I sincerely hope you take a minute and let that soak in. Your share, as a taxpayer is more than $135,000. Briefly, the primary contributors to our debt are Social Security, Medicaid, defense and safety net programs. These account for 75% of government expenditures. Any uptick in interest rates will push the total towards 90% in just a couple of years. These programs must be adjusted. We simply don’t have enough people paying in to accommodate the growing number of people being paid out.

Voters must begin to understand that each individual can’t have the government protect them from the realities of personal responsibility. This means that we, as individuals must learn to live within our means. This means that we can’t blame the system for failing our children when we aren’t actively participating in their education. This means that we must learn how to compete globally rather than asking the government to limit competition for our goods and services. Finally, this means that our elected officials need to come from positions of real world experience rather than the world of academia with no real world experience and their only job security being re-election.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Fiscal Responsibility and the U.S. Election

This week we look at the Federal deficit, its causation and the fundamental shift in thinking that must take place here in the U.S. to avoid our own version of the fall of Rome. The United States currently owes more than $16,000,000,000,000. That’s sixteen trillion dollars. That is our total debt owed. The government sells new bonds and Treasury Notes to collect enough revenue to cover the interest payments due on the bonds and Treasury Notes that have already been sold that are maturing. This also makes up the funding shortfall from tax collection. The creation of new debt to service old debt is a good idea in a falling interest rate environment. Think of it as refinancing your house at a lower rate. Alarmingly, we are still spending more than we make, which adds to the total debt and our not so distant nightmare.

Global interest rates are at unprecedented lows because other countries are refinancing their own debts using the same methods we are. This is exactly what is going on Europe as they try to save their economic Union. This is the, “easy money policy,” that the news and politicians refer to. The whole point is to be the first one to fill the market place with super cheap loans before interest rates start to turn higher. This is printing money and currency devaluation. We are trying to repay the expensive money we owe from debts we’ve previously incurred with newly printed cheap money. It works in theory until interest rates begin to climb. Think of it as revolving credit card debt that keeps getting rolled over to new trial offers. Once the offers wear out, the holder is stuck with the balance at an incredibly high interest rate.

When this happens to John Doe, he calls a credit counselor who tries to negotiate a settlement with the lender. The alphabet soup of regulation, the ECB, IMF, EFSF and others are shifting the burden of Greece’s debt from the country to the European taxpayers. According to The Telegraph, European taxpayers will own 85% of Greece’s debt by 2015.  This is why the fiscally responsible Germans are reluctant to help the spendthrift Mediterranean countries.

European taxpayers want Greece to pay both literally and figuratively. The European credit card counseling sessions include forcing the deepest budget cuts Greece can endure thus allowing them to make their credit card payments. This includes cutting medical care, pensions, education, highway and water systems, etc. This also causes riots in the streets.

The U.S. owes $16 trillion. Nearly $10 trillion (62.5%) of that debt has been sold to U.S. taxpayers. Banks, insurance companies, state and local governments, pension funds, mutual funds, savings bonds and the Federal Reserve depository system account for 8 out of the top 10 holders of U.S. debt. China and Japan round out the top ten at numbers 2 and 4 respectively. 

The Congressional Budget Office (CBO) has been issuing warnings for more than a year that the debt path we are on is unsustainable, stating that our budget deficit, our annual shortfall, will surpass $7 trillion within the next 10 years. These deficits are compounded. We add this year’s shortfall to the previous years’ shortfalls to come up with our total deficit. Long story short, our country will continue to spend more than we make for at least the next decade. This is the path to a Grecian outcome.

The United States must get its financial house in order. We cannot afford to fund Medicaid, social security, unemployment, disability, education and defense when servicing our current debt load leaves $.10 of every dollar available for funding. Would you have a problem getting by if $.90 of each Dollar you earned went towards your debts?

There are solutions. Briefly, corporate taxes must be cut so that businesses are encouraged to remain in the U.S, rather than incorporating offshore. Small business regulations and employee expenses must be cut so that American entrepreneurs can get back to generating breakthroughs in innovation. Remember, Microsoft, Apple and Google were all small businesses once. Finally, the balance between the, “haves” and the, “have nots,” must be addressed. I believe that those who make more spend more and should pay more. Benefit programs must be reduced. A consumption or, Value Added Tax (VAT) that places a greater portion of the burden on those who spend the most could equitably offset some of the social program cuts. It would slow domestic consumption and encourage domestic savings as well as proportionately distributing the tax burden by making those who spend more, pay more. We need to act, as we would have our representative government act. Save more, spend less and get our own budgets in balance before the global credit counselors impose their will on our earnings and our country.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Unemployment and the Presidential Election

Placing the employment situation in the election debate is not as straightforward as one would imagine. Nate Silver, author of the Five-Thirty-Eight blog in the New York Times published a wonderful article on the mathematics behind unemployment and the election cycle. The statistics and calculus prove that any correlation is minimal, at best and subject to causation errors at worst. The point is that it disproves the commonly accepted notion that an incumbent is the odds on favorite in an improving employment scenario as well as disproving the notion that historically high levels of unemployment guarantees a political reversal.

Deeper analysis of the unemployment numbers reveals some disturbing trends that are often masked by our acceptance of the headline numbers. There are three primary concerns. These include the way the unemployment numbers are calculated, the changing composition of the American workforce and the reasons why small businesses haven’t participated in this economic recovery in the same manner as they have in the past.

The Bureau of Labor Statistics (BLS) is the mother lode of employment data. Using their numbers, we can clearly see that even though the headline rate is declining, the average American isn’t feeling too secure. The number of employed people in the United States peaked at 146,595,000 people in November of 2007 and the low point of the recession was 137,968,000 in December of 2009. Our current level of 141,637,000 puts us back where we were in June of 2005. Therefore, it’s been nearly seven years since the total economy has added any jobs. The unemployment rate in June 2005 was 5.0% and we currently stand at 8.3%. The 3.3% increase is a reflection of our population growth over the last seven years and new workers attempting to enter the labor market who are unable to find jobs. The calculation of the unemployment numbers also does not reflect 1,059,000 people who have given up looking for work. If we were to add them to the 12,758,000 people who claimed unemployment last month, we end up with a more accurate national average back above 9%. Finally, those unemployed more than 27 weeks now make up more than 40% of the total unemployed population. This is another all time record.

Barack Obama was masterful at engaging young voters in the ’08 election. His ability to capture and mobilize that voting block was a key factor in his election. Those same voters that were disgruntled and alienated by the old boy’s network of the previous administration will be a wild card going into this year’s election. During the current administration’s term we have seen youth unemployment skyrocket to all time highs and remain there. The primary reason for this has been a demographic shift to retiring baby boomers now competing for part time jobs that were once the sole domain of young people entering the workforce. While overall unemployment is 2% higher than it was in 1993, the number of workers aged 55+ remaining in the workforce has increased by more than 10% over the same period and continues to accelerate.

This leads us to our final point. Small businesses have altered the way they participate in the economy. They are hiring less and they are hiring older. Regardless of the political sound bites affirming a candidate’s pro small business position, the boom in legislation and regulation is placing a disproportionate increase of new employee costs on small businesses. Policies like payroll taxes and healthcare reforms have raised the costs of hiring new employees by nearly 25% over the last 10 years. This is a bi-partisan issue that must be addressed if the employment situation is to improve.

The national unemployment number peaked at 10% in October of 2009 and currently stands at 8.3%. According to the national averages the employment picture is improving. However, the current rate is still the highest since 1983, present crisis excluded. Voters will be forced to try and determine if the declining trend works in the President’s favor or, if the stubbornly high rate of unemployment is to be held against him. Voters will also have to determine the best candidate to protect social security, 401k’s, IRA’s and private pensions, as baby boomers remain fearful of their futures and clog up the natural order of the workforce retirement cycle.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.