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Historical Wheat vs Corn Spread Prices

Trading the grain markets has always been tricky, especially during the planting and harvesting periods. Historically, this has placed us at the agricultural epicenter for global grain trade. Obviously, tension in Ukraine and the corresponding 15% spike in wheat prices have reminded everyone that even the agricultural markets are now a global game. In this respect, it’s no longer enough to keep an eye on domestic weather patterns to determine the success of our winter crops or anticipate spring wheat seeding. Now, it is imperative to focus on global production issues and World Trade Organization (WTO) agreements, as well.

Continue reading Historical Wheat vs Corn Spread Prices

Equity Market’s Race to the Top

The equity markets have just been rip roaring strong. Companies like FedEx, Google, Morgan Stanley, Walt Disney and Boeing have all gained more than 40% this year. The equity markets have made new all time highs, eclipsing the pre-crash highs from 2007 with hardly a shudder and soldiering on past the tech bubble highs of 2000. Recently, the technical analysts at Merrill Lynch came up with a four-year target of 2300 in the S&P 500. This is based on their analysis of the long-term pattern that was triggered by the new highs. The S&P 500 has climbed more than 150% since March of 2009. While I’m the first to admit that I’ve left a lot of money on the table by not sticking with the long side of equities, I’ve been doing this long enough to know that there’s always another trade. Therefore, I will not be committing new money to the long side of the equity market at these levels in 2014.

The way I see it, there are two opposing forces at work here. First, we have the Federal Reserve Board that keeps pumping money into our economy. The Fed continues its easy money policies indefinitely. There are seven voting members of the Federal Reserve Board of Governors. Six of them have been broadly categorized as dovish, in favor of easy money/stimulus. There are four more rotating members from the national Federal Reserve Banks. This is where things may get a bit interesting. Three of the rotating members gaining a vote in 2014 are centrist to hawkish. While the doves are still clearly in control, especially with Janet Yellen expected to assume the Presidency of the Board, the dialogue in the minutes of their meetings could change substantially.

The easy money policies have favored the equity markets in a couple of different ways. The artificially depressed interest rates have forced investors to accept more risk for returns that used to be outside the scope of retiree investing. The stretch for yield has driven a boom in riskier corporate bonds as investors move down the ladder in an attempt to maintain their portfolio’s value. This has caused a surge in lower credit bond prices reminiscent of the sub prime mortgage debacle of the mid 2000’s.  Investors’ lack of satisfaction with the governmentally manipulated yield curve has led them to seek returns in the stock market specifically, through high yield investments like Real Estate Investment Trusts and utilities. What has gone unnoticed is the disappearance of nearly half of the companies listed on U.S. exchanges. Therefore, there’s more money than ever chasing a smaller number of stocks in the last 25 years.

Secondly, we have reached valuations that bode poorly for long term investing. Research abounds on the usefulness of long-term valuation models. Very simply, expecting these returns to continue through long-term investment at these valuations would set an historical precedence. Anything can happen in the world of markets but the odds clearly show that bull markets do not begin when the P/E ratio of the S&P 500 is above 15.  The S&P 500’s P/E ratio currently stands above 19 and Nobel Prize winning Yale economist Robert Schiller’s cyclically adjusted price earnings (CAPE) ratio is over 25. Both of these will continue higher as long as the equity markets continue to climb. Neither is sounding the, “Everyone to cash,” alarm bell. Their history simply suggests that it would be foolish to expect these multiples to continue to climb and climbing P/E ratios are necessary for stock market growth.

Closing in on 2014 has left many money managers whose performance is benchmarked against index averages scrambling to catch up. There are two ways a manager can do this. First, wait for a sell off and try to buy in at a discount. This is part of the reason that the weakness in July, August and October was so quickly recovered. Second, apply leverage so that the manager’s fund gains more than $1 for every $1 the market moves. Leverage seems to be the move of choice. This year has seen a huge inflow into equity mutual funds, which have to be benchmarked to their index. By comparison, each of the last two years saw net equity mutual fund outflows. The added influx of cash has led investment managers into the futures markets, specifically the S&P 500 futures. The most recent Commodity Futures Trading Commission’s Commitment of Traders report shows a 10% growth in leveraged longs as well as a 5% decline in leveraged shorts. Finally, margin debt on the stock exchange itself has also reached an all time high.

The case I’ve laid out says nothing about where we’re going. Liken this presentation to a new home survey. The place has curb appeal. The neighborhood is growing. The government is supporting its growth. Each new home sells for more than the last. What could be wrong with buying now? Well, the inspector may inform you that everything you believe to be true is resting on a shaky foundation. The house may stand for years or, not. Personally, I’d rather be in on the ground floor than looking for a window to jump out of having climbed in at the top.

China Bolsters Copper Market

The United States is crawling into 2014 with the Federal Reserve Board doing everything it can to stave off deflation. Years of zero percent interest rate policies along with the current $85 billion per month in stimulus have failed to generate inflation in anything but the stock market. This leaves GDP well below 2% and unemployment remains stubbornly high. Meanwhile, the European Central Bank just cut their rates in half, now at a .25%, to spur any kind of economic growth of their own. Typically, two thirds of the world, North America and Europe mired in economic doldrums would lead to a generally soft commodity outlook. However, China’s growth continues to be the real story and this is best explained by the inner workings of the copper market.

China’s growth rate continues to exceed 7.5% and is expected to register a third consecutive quarter of growth, which may top 8% for Q4. The vast majority of this growth is in building. Industrial infrastructure and residential construction continue to boom. China’s arcane domestic investment laws are partly to blame for this as their residents have very few open channels of investment other than real estate. Further muddying the waters is their version of the loan qualification process, which now accepts hard assets, like copper as collateral. This has put China in the top spot in global copper consumption. In fact, they consume approximately 40% of the world’s copper shipments.

We often refer to copper as, “the economist of the metals market.” The logic follows the line of copper as a base need for economic expansion, which we view as building stuff – houses, electronics, buildings, cars, etc. It appears that the Chinese growth story is bigger than old world economic malaise. The copper market has seen renewed interest in commercial buying since Bernanke’s tapering talk in August signaled an, “everybody out of the pool,” moment.  In fact, cash copper prices are trading above the copper future’s price and copper miners are negotiating just how high they’re going to set their premiums for 2014.

The current spot premium is around $.05 – $.07 per pound which reflects the highest premium since the collapse of ’08. The surge in demand is prompting premium increases of 50% and higher as producers negotiate with Europe, Asia and America. Codelco, the world’s largest copper producer has announced planes to raise Chinese premiums by 41%. There are similar increases of 50% for the U.S. and up to 75% for the European Union. These price rises come in the face of an expected surplus of 200, 000 tons (less than 2% of total market) after experiencing a three-year supply deficit. In spite of the projected surplus, Codelco has openly admitted that they’ve hedged none of their forward production.

Commercial traders in the copper market were what tipped me off to the market’s increasingly bullish outlook. I was so busy looking at our domestic economy that I didn’t see the rebound in their buying after initial talk of tapering, which pointed to slowing growth and declining demand created the bearish scenario I outlined in Augusts’, “Copper Points to Slowing Economy.” Clearly, the cash market premiums are leading end line users to hedge their future needs through the purchase of forward copper futures contracts.

The largest net long position I can find for commercial traders in the copper market is near 40,000 contracts. This was made during the July sell-off. Previously, the largest net long commercial position I could find was in February of 2009 when copper was trading at $1.75 per pound and we were coming out of the major market crash.  What the market is seeing now is a greater willingness to own copper at much higher prices. This buying support is putting a floor in the market around the $3 per pound level and is prolonging the sideways market direction that has persisted throughout the year. The longer this occurs, the closer we are to breaching the downward sloping trend line that originated at the 2011 highs around $4.80 and now comes into play around $3.36 per pound. Obviously, a move above this would confirm the move for 2014.

We see two potential concerns in this 2014 scenario. First of all, China has always been an opaque marketplace where the economic statistics produced by the government must always be taken with a grain of salt. There is talk that end line demand is nowhere near as strong as Chinese imports suggest. However, for our purposes, it is pretty irrelevant if China is using their copper imports or, storing them. Either way, supplies are being taken off the market. Secondly, much of the mining that’s counted in moving us to surplus is in new mines whose production is only estimated. Therefore, their production numbers aren’t yet solidified. Finally, all things considered, copper may be one of the best physical assets to own as we approach 2014.

Wheat May Have Bottomed Out

The wheat market is a primary staple in human diets as well as global trade. This causes the wheat trade to be affected nearly as much by geopolitics as it is by price and weather. Therefore global trade prices have to factor in sanctions, duties and taxes as well as transportation fees. The simplest way to understand this is by looking at the surplus produced by the primary growers like Canada, Ukraine, Russia, Australia, Argentina and the European Union as well as us and then trying to determine why each one of those countries are also wheat importers. Due to the conflagrated nature of global trade negotiations, I find it easier to focus on the primary players here in the U.S. and plan my trades accordingly.

First, I screen the markets’ traders and their eagerness to participate in any market by reviewing the Commodity Futures Trading Commission’s weekly Commitment of Traders Report. This report breaks the markets’ participants into a few primary categories – index traders, non-commercial traders, commercial traders and non-reportable. Briefly, Index traders manage the long only allocation portion of the fund they represent. Non-Commercial traders tend to be the money managers within the futures industry. They trade from both the long and short side as they see fit. Commercial traders are either the producers of the commodity or, the end line users of it. Their trading is based on managing their costs from the production side and maximizing their profits on the producer side. Finally, the non-reportable category is left to small speculators, producers and end line users who are too small to qualify for a larger group.

Hedge funds fall into the non-commercial trader category and their movement finally began to be tracked by the CFTC in 2006. The last three weeks has seen the largest jump in their short position since their trading has become a matter of public record. There are three important factors at work here. First of all, most of this selling took place prior to the November 8th USDA crop report. Secondly, commercial traders in this case, the end users, have absorbed every bit of selling the speculative money has thrown at them. Finally, this dynamic shift in market participant makeup comes near major support near $6.50 per bushel in the March Chicago Board of Trade contract.

This sets the stage for a climax. Our bet is that most of the price decline has passed. Commercial traders are value players. We are looking at the end line wheat consumers locking future delivery prices in order to generate their business models for 2014. Cereal and bread producers are fully aware of what their input costs are and they clearly view this as a bargain. The non-commercial traders who’ve taken the short side of this market are typically trend followers and pay little attention to price. They’re simply riding the wave….until it crashes.

I believe their wave is about to crash. First of all, wheat hasn’t been this cheap since July of 2010. Secondly, in both June of 2010 and May of 2012 commercial and non-commercial traders squared off in a similar manner. These market imbalances strongly favor an outcome in favor of the commercial traders. In fact, most solid wheat rallies start by commercial traders putting a floor in to support prices and lock up future inputs. Conversely, every trend trader trades the trend until it’s over then, they give back a chunk of their profits on the ensuing market turnaround. Finally, open interest peaked in September and has begun a much earlier decline than normal into the December futures expiration cycle. This means the market is failing to attract new players at these depressed levels.

The daily chart shows a solid basing pattern that is holding just above major support. The December wheat futures rapidly approaching expiration means that anyone who doesn’t intend on delivering wheat of the appropriate standard to an approved collection site as well as those who aren’t fully prepared to take delivery of the contracts they’ve purchased must offset their position. Obviously, end line consumers are looking forward to their delivery of cheap wheat. Meanwhile, none of the non-commercial speculative money will be able to make any deliveries. Therefore, I believe that the buying from non-commercial short covering will begin to fuel a rally in the wheat futures market.

You can find more on our application of this strategy at COTSignals.com.

Softening Commodities Ahead

Louise Yamada, a very well respected technical analyst was recently on CNBC discussing the case for a, “death cross,” in the commodity sector. While I agree with the general assessment that commodity prices as a whole could soften over the next six months, I take issue with the market instrument she chose to illustrate her point, the CCI as well as the general uselessness of this instrument as an investment vehicle. Therefore, we’ll briefly examine why we agree with the softness of the commodity markets and what I believe will follow shortly thereafter as well as a useful tool for individuals looking for commodity market exposure.

The CCI is the Continuous Commodity Index. This index originated in 1957 as the CRB Index as named by the Commodity Research Bureau. It’s been revised and updated many times over the years to generally represent an equal weighting of 17 different commodity futures contract and is continuously rebalanced to maintain an equal 5.88% weighting per market. This really was the pioneering commodity index contract and was traded at the Chicago Mercantile Exchange actively until the early 19990’s. The proliferation of commodity funds and niche indexes since then has rendered the CCI useless and untradeable. In fact, the Intercontinental Exchange that held the licensing for this product delisted it this past April.

Louise Yamada’s point that the commodity markets may be softening is worth noting. She attacked it from a purely technical standpoint. She used the bearish chart pattern that was setting up on her hypothetical contract to illustrate the waning nature of the commodity markets’ failed rally attempts over the last year to suggest that there is more sell side pressure on the rallies than there is a willingness to buy on the declines. She further illustrated her point using the “death cross” of declining moving averages to suggest further bearishness was in store for the commodity markets cleverly noting the frown pattern made by the highs over the last two years.

I’m a big proponent of technical analysis as well as chart pattern recognition (Our Research) however, my reasons for generally bearish commodity behavior over the coming months has far more to do with the sluggish nature of the global economies. China is still the primary source of global economic expansion. Their economy is both large enough and strong enough to buy the world time to work through the overexpansion and corresponding crash of the housing/economic bubble that hasn’t been completely digested, yet. Furthermore, the unabated quantitative easing has lost its ability to boost the economy as a whole and is simply fueling an equity market bubble as the world’s largest players seek parking spaces for the ultra-cheap money that only they have access to. Therefore, until Europe turns the corner and we begin to reconcile the difference between the doldrums of our economy and the exuberance of our stock market, the end line demand for commodities will remain soft.

The flip side to the waning demand story is that once the tide turns, all of the liquidity that’s been pumped into the global economic system will finally trigger the next massive commodity rally. The first leg was fueled the Federal Reserve and Mother Nature. Massive quantitative easing in the wake of the housing collapse fueled massive speculation in gold, silver and crude oil markets. This was followed by one of the worst droughts in U.S. history sent the grain markets to all time highs. Clearly, we’ve gotten a taste of what happens in the commodity markets when there’s a rally to be had. Money attracts money and that’s why we saw the evolution of the Continuous Commodity Index from a single to contract to every conceivable niche market in futures, ETF’s and index funds.

Some of these niche markets have developed a strong enough following to make them tradable. The most liquid commodity futures index contract is the Goldman Sachs Commodity Index Excess Return contract. This is based on the Goldman Sachs Commodity Index (GSCI) affectionately termed the, “Girl Scout Cookie Index” by floor traders when it came on the scene in the mid 1990’s.

This market currently has an open interest of more than 25,000 contracts. The bid/ask is relatively wide at approximately $100 per contract difference but the liquidity is solid with a total of more than 100 bids and offers showing on the quote board. This index, like the old CCI is still heavily weighted in the energy sector with Brent crude and West Texas Intermediate crude accounting for nearly half of the weighted index. The bright side is that this index only has a margin requirement of $2,200. Ironically, a half size mini crude contract requires $2,255 in margin. You can find all futures market hours and point values here. The balance of the index is weighted 15% towards growing commodities like wheat, corn, coffee and sugar. Livestock comprises another 4.5% and metals makes up about 10.5%.

This fall and winter should provide time for the markets to finish digesting some of the previous boom cycle’s excesses. We’ll also have lots of global data coming from Japan, China, India and Germany as well as a new Federal Reserve Board Chairperson of our own. The trillions of Dollars that have been poured into the economy will eventually end up chasing returns. That will be the point when inflation begins to creep in. Weaning the economy off the monthly doses of funding is becoming harder and harder with each dose administered and the major players won’t be happy about it. Therefore, it’s sure to continue for too long and will only be reigned in once it’s too late.

Energy in the U.S. and China

The global energy market recently passed two milestones. First, China passed the US as the number one importer of crude oil in the world in September. Second, the US passed Saudi Arabia as the largest fossil fuel producer in the world last week. Neither of these incidents came as a surprise. Both trends have been progressing roughly as expected. However, now that we’ve reached critical mass in forcing the evolution of the global energy markets, it’s time to take a look at some of the longer-term changes that will arise as a result of these events.

China was destined to become the number one energy importer due to its population growth, economic growth and geography. While we are concerned about whether the effects of the government shutdown may trim two percentage points off of our third quarter GDP of less than 2%, the Chinese have been chugging along at GDP near 8% and haven’t seen their Gross Domestic Product drop below 6% since 1991. The economic boom in China is still in full swing. Speculative phases like warehouse space or production facilities may have been overbuilt just like their housing markets but the infrastructure buildup remains in full force. The governmentally sponsored projects continue to redefine the Chinese way of life through the addition of roads, bridges, trains and power plants.

The growth in China comes as we isolate ourselves here in North America. China is still our second largest trade partner. Most of our trade with them is at the cheap manufacturing level. Meanwhile our number one trade partner has become Canada. Our trade with Canada is much nearer to equal than our Chinese trading relationship. According to the July, 2013 US Census, our trade with Canada occurs at a 7% deficit while we import 280% more goods from China than we export to them. Our growing isolationism can be confirmed since Mexico is our third largest trade partner.

This brings us back to Saudi Arabia and energy production. There are two main reasons for our declining ties to Saudi oil. First of all, American vehicles have become more fuel-efficient. The University of Michigan tracks average fuel efficiency of all new cars sold on a monthly basis. There has been a 20% increase in the fuel efficiency since 2007. Furthermore, the, “Cash for Clunkers” program took approximately 700,000 inefficient vehicles off the market further adding to the overall efficiency of our current fleet. Secondly, fracking and tar sands production have vaulted the US into the leading petro-chemical producer in the world. Saudi Arabia and Russia still produce more oil but our total distillate output has surpassed them.

These major trends will continue for many years into the future. The US is expected to become fully energy independent by 2020. Meanwhile, China will become increasingly dependent on world supplies. We used the following example in describing the growth of the Chinese hog market a few years ago and the comparison still fits. The Chinese story is all about developing a new middle class and putting newly disposable income into new hands. The first new expenses are better food, clothing and shelter. Moving up the ladder, the new middle class expands into luxury goods like cars and vacation travel. The average Chinese person uses about 3 barrels of crude oil per year. The average US citizen use more than 21 barrels per year. Clearly, this gap has room to close as the new Chinese middle class continues to westernize.

The growing demands of the Chinese middle class will change the way China conducts itself in global politics. Energy analysts at Wood McKenzie expect China to claim as much as 70% of the global oil imports by 2020. Therefore, at the same time the US becomes energy self-sufficient, China will become even more energy dependent. This will place them in a different role regarding global peace, especially in the Middle East, as unrest there will affect their country more than anyone else. This should cause China to continue to grow their military, especially their naval power and should have the unintended benefit of allowing us to scale back our military investments. Hopefully, the politicians here won’t spin this into another cold war as an excuse to renew domestic military investment

China’s growing need to purchase oil on the global market will force their hand in freeing up their currency to float.  Trade partners will not do business in a currency that can be manipulated at the drop of a hat. Opening their markets and allowing their currency to float will encourage investment flows in both directions. Big picture analysis suggests that this could be the catalyst towards pushing China into the dominant super power role. They have the demographics and capital necessary to generate the need for currency reserves and open markets. The last thing to develop will be the political ties towards the Middle East oil producers and finally, armed services to guarantee their trade routes remain open.

Economic Recovery or, Shell Game?

The National Bureau of Economic Research, the ones in charge of official business cycle dating, said Monday that the recession officially ended in June of 2009. Their statement allowed that although economic conditions may not have been favorable since then and that the economy has not returned to normal operating capacity, the recession ended and a recovery began in June 2009. This is good press for the incumbent party heading into election season. However, this is also a brightly burning example of why we shouldn’t trust a sound bite.

 

The bursting of the domestic consumption based economic bubble has left the politicians scrambling to secure their next terms in office. The best way to guarantee re-election is to make everything seem all right to the general voting public. I’m not taking sides in this. The problem is more systemic than it is partisan. The issue starts at the top with former Federal Reserve Chairman Alan Greenspan and the torch has been passed to Ben Bernanke, another Federal Reserve Chairman bound and determined to keep the money flowing. My sincere fear is that the day of reckoning will come when the people who buy our Treasuries to service, and grow, our debt will say, “This is a bad deal. We need to be paid a higher interest rate to take on your credit risk.”

 

The United States as a country has become an unfortunate reflection of the consumer society that our politicians have sought for generations to instill in their constituents. We are now facing the same economic problems at the national level that used to be handled at the dining room table by the family. We are simply over extended. We have spent too much for too long. We must admit that the budget surplus of the Clinton era had more to do with fortuitous timing than sustainable growth and that our projections were wrong. The paradox is that the same legal/governmental system that is all too ready to jump in and save the individual from their own bad decisions fails to acknowledge their own fallibility. The institution of government is being failed by the hubris of the individuals running it.

 

Enough hyperbole. The shell game is being played out in the transfer of private debt to governmental debt. This has enabled business and personal consumption to carry on with as little personal or, corporate lifestyle adjustment as possible. The United States’ personal rate of savings has climbed from 0% in June of 2004 to 6% currently. Over the last 50 years, 6% is much closer to the average. As individuals began to save, governmental spending increased 82% and our deficit grew from 7.35 trillion in 2004 to an estimated 13.4 trillion this year. It is estimated that the gross federal debt will approach 90% of gross domestic product. That leaves 10% of GDP to make the interest payments on existing debt and cover all national expenditures. For example, if your take home pay were $50,000, $45,000 of it would cover your minimum monthly interest payments. The leftover $5,000 would have to cover a year’s worth of basic living expenses like food, clothes, gas, entertainment, etc. The Congressional Budget Office estimates that gross federal debt will exceed gross domestic product by 2012.

 

The government, just like us, has run deficits going back to the Civil War. The issues are size and accountability. Deficits were designed to allow for the purchase of goods and services based on future earnings. This is how we buy houses and cars. The concern is the overextension and lack of self or, governmental control. It is the inability, “Just say no,” that gets all of us into trouble. A politician who stands up and suggests we all tighten our belts will have $0 funding for his election campaign. Businesses won’t contribute, banks won’t contribute, special interest groups won’t contribute and if the politician’s constituents listen, they won’t contribute either. Therefore, the plan to get us out of this mess is by spending more money while devaluing the U.S. Dollar.

 

The plan goes something like this. The government sells more Treasuries on the open market to generate stimulus funds to be spent on domestic programs to placate the people, domestic businesses and special interest groups.  The more Treasuries the government sells, the more U.S. Dollars it places in circulation. The more Dollars in circulation, the less they’re worth. The less the Dollar is worth, the more expensive it becomes to purchase foreign goods and services. This encourages more people to, “buy American.” This also makes domestically produced goods and services cheaper to purchase for foreign countries, therefore, increasing U.S. exports. The hope is that this will allow U.S. businesses to gain traction and begin hiring again.

 

In normal times, this has kept the balance of things moving forwards. I would suggest that these are not normal times. First of all, we are starting this process from a much higher debt ratio than ever before. Assume that you’re very nearly maxed out when an unexpected major medical expense or car repair comes up. Secondly, the U.S. has been able to grow its debt periodically through the sale of Treasuries when needed because we have, more or less, managed our expenses, which made the U.S. a safe credit risk. This is like being able to make at least the minimum monthly payments to your creditors in the roughest of financial times. Third, the Dollars we are borrowing will not be worth as much as the Dollars we are repaying. Typically, this difference is made up in the interest that we have to pay back with the principal. Finally, this is the same path being sought out by the entire Euro zone, England, and Japan, which puts us in the middle of a global competitive devaluation.

 

The end result is that it won’t take long for the countries that are lending us money to decide that they can do better lending to someone else, perhaps another country or, their own populations. Keep in mind that we are talking about the creation of new debt or, extending more credit on top of the current debt we will be struggling to pay the interest on. Essentially, following the path of increasing deficits in an attempt to grow our way out of societal gluttony and the misguided actions of elected representatives will only continue the downward debt spiral until someone has the courage to stand up and yell, STOP! As we approach this election season, I’ll cast my ballot for the candidate that simply states, “We’re going to have to learn to do more, with less.”

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 in investing in futures.

 

Natural Gas Bottoming?

November natural gas may very well be forming a tradable bottom at these levels. There are several reasons for this.

1) Seasonal patterns in November natural gas tend from the last week of August through the first week of September.

November Natural Gas Seasonal Chart

2)The commitment of traders commercial category continues to add to their positions, adding 11,000+ contracts last week which places them within shouting distance of their all time record long position. Perhaps, more importantly, commercial traders are becoming increasingly bearish on crude while building net long positions in natural gas.

3) The crude oil spread versus natural gas is bumping up against solid resistance at crude oil priced at 20 times the natural gas price. This is reflective of the commercial traders price action.

4) The COT Signals triggered a buy signal for Monday’s trade which corresponded with a technical breakout to the high side.

There are two natural gas futures contract sizes. The full size carries a margin of $5,400 and recent average day range of $1,600. The mini contract is 25% of the full size contract. The margin requirement is $1350 and its daily range is around $400.

Please call with any questions.866-990-0777

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 in investing in futures.

Following Up on Corn, Weekly Exports and the Dollar’s Devaluation

 

Corn continues to march to new highs, now trading around $4.80 per bushel. Much of what we’re seeing is demand driven. I was looking at corn sales for the marketing year ending September 1st and it validated much of what we’ve been discussing.

 

From the USDA website. China has imported 236,000 metric tons this marketing year. Over the last three years, their U.S. corn imports total 0. Yes, that is a 0.  While this is only 1.5% of our total exports, it must come as a surprise demand factor due their absence of imports in the past. Also of note, Taiwan imported 651,000 metric tons. This is up from 488,000 last year and 0 in the previous two years. Yet another upside surprise. Combine this with Japan’s 66% increase over last year and you have three Asian countries’ demand increasing from 166,000 tons in 2008 to 5,216,000 tons in 2010. This accounts for 1/3 of all exports and obviously represents a HUGE piece of the pricing mechanism. Weekly net exports are as high as they’ve been in the last 10 years.

Fundamental Analytics Weekly Net Sales chart is the 2nd, “Interesting Formation .”Full access to currenc and historical grain reports is available at USDAGrainReports.com

I apologize for the poor formatting. While I may be technically competent, I’m not always technically capable. CORN – UNMILLED                                     MARKETING YEAR 09/01 – 08/31   OUTSTANDING EXPORT SALES AND EXPORTS BY COUNTRY, REGION AND MARKETING YEAR1000 METRIC TONS       AS OF SEPTEMBER 2, 2010——————————————————————————–                      :      CURRENT MARKETING YEAR         :NEXT MARKETING YEAR                       ———————————————————                      :OUTSTANDING SALES:ACCUMULATED EXPORTS: OUTSTANDING SALES                        ———————————————————   DESTINATION        :THIS WEEK: YR AGO:THIS WEEK: YR AGO  :SECOND YR: THIRD YR——————————————————————————–                      :EUROPEAN UNION – 27   :     1.0      0.3       0.0      0.0        0.0       0.0   SPAIN              :     1.0      0.1       0.0      0.0        0.0       0.0   U KING             :       *      0.2       0.0      0.0        0.0       0.0                      :JAPAN                 :  4329.5   2595.1     166.6     88.9        0.0       0.0                      :TAIWAN                :   651.4    487.9       0.0      4.3        0.0       0.0                      :CHINA                 :   236.0      0.0         *      0.0        0.0       0.0                      :OTHER ASIA AND OCEANIA:  1214.5   1696.4      57.3    117.9        0.0       0.0   HG KONG            :     1.3      1.5       0.0      0.0        0.0       0.0   INDNSIA            :     0.0      1.4       0.0      0.0        0.0       0.0   ISRAEL             :   226.0      0.0       0.0      0.0        0.0       0.0   KOR REP            :   832.1   1633.3      57.3     57.8        0.0       0.0   MALAYSA            :     3.3      3.0       0.0      0.2        0.0       0.0   OPAC IS            :     0.0      1.6       0.0      0.0        0.0       0.0   PHIL               :     0.5      0.0       0.0      0.0        0.0    &
nbsp;  0.0   SYRIA              :   151.0     50.0       0.0     60.0        0.0       0.0   VIETNAM            :     0.3      5.6       0.0      0.0        0.0       0.0                      :AFRICA                :  1144.5    557.7       0.0    174.6        0.0       0.0   ALGERIA            :     0.0      0.0       0.0     26.5        0.0       0.0   EGYPT              :  1090.0    487.8       0.0    130.1        0.0       0.0   MOROCCO            :    29.5     49.9       0.0     18.0        0.0       0.0   TUNISIA            :    25.0     20.0       0.0      0.0        0.0       0.0                      :WESTERN HEMISPHERE    :  3739.0   4112.2      61.9    151.2        4.6       0.0   BARBADO            :     3.2      6.1       0.0      0.0        0.0       0.0   C RICA             :   129.4     71.3       0.0      0.0        0.0       0.0   CANADA             :    90.2    251.3       6.7     22.1        0.0       0.0   COLOMB             :   295.5    582.3       0.0      0.0        0.0       0.0   CUBA               :    75.0    200.0       0.0      0.0        0.0       0.0   DOM REP            :   243.1    196.8       0.0      0.0        0.0       0.0   ECUADOR            :     0.0     45.0       0.0      0.0        0.0       0.0   F W IND            :    19.5     17.1       0.0      0.0        0.0       0.0   GUATMAL            :   248.8    394.9       0.0      0.0        0.0       0.0   HONDURA            :    82.1     96.7       3.5      0.0        0.0       0.0   JAMAICA            :    64.8     57.6       1.5      0.0        0.0       0.0   LW WW I            :     0.5      1.8       0.0      0.0        0.0       0.0   MEXICO             :  2283.0   1822.9      30.2     80.1        4.6       0.0   NICARAG            :    11.6      8.7       0.0      0.0        0.0       0.0   PANAMA             :   103.7     99.0       0.0      0.0        0.0       0.0   PERU               :    36.5    217.5       0.0     23.5        0.0       0.0   TRINID             :    24.0     15.0       0.0      0.0        0.0       0.0   VENEZ              :    28.2     28.2      20.0     25.5        0.0       0.0——————————————————————————–TOTAL KNOWN           : 11315.9   9449.6     285.8    5
37.0        4.6       0.0TOTAL UNKNOWN         :  3786.6   2681.9       0.0      0.0       50.8       0.0——————————————————————————–TOTAL KNOWN & UNKNOWN : 15102.5  12131.4     285.8    537.0       55.4       0.0EXPORTS FOR OWN ACCT  :      –        –       21.9     34.3         –         – OPTIONAL ORIGIN       :   141.8    127.1        –        –         0.0       0.0——————————————————————————–

 

These export figures also fall right inline with the Dollar’s declining value. The Yen hit a 15 year high against the Dollar last week and the Chinese Yuan continues to appreciate, in spite of their officially pegged boundaries to the greenback. We also saw the Dollar depreciating against several African currencies, including the Egyptian Pound.

 

Further examination of the table reveals little in the way of exports to the Euro zone, with Spain and United Kingdom being the only two countries to make the list. Obviously they have an added advantage in being able to grow their own crops but, with the severe weather problems they’ve had this summer and the impact on their crops, one would think we might see an uptick in exports to this area.

 

I read an interesting article this weekend detailing the competitive devaluation race between Euro zone, United Kingdom and the United States. The current political plans are similar among all three. All three must devalue their currency in order to make their exports more competitive and force increased domestic consumption upon their people. This is the only way they can grow their way out of their recessions while keeping domestic inflation in check. However, at the same time they are printing money to devalue, they are forcing the individual savings rate to increase (the U.S. has gone from 0 savings to 6% in the last year), this also reduces domestic demand, stifles small business and lowers taxable receipts. Keeping this in mind, it becomes a race to see who can implement the process the most efficiently and beat the other faltering countries to the end game of sustainable growth and manageable debt.

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 in investing in futures.

 

Bucking the Dollar’s Decline

The main argument supporting inflation is based on the current prices in the commodity markets. The argument postulates that the massive injections of capital through low interest rates and the government’s active purchase of long term treasuries is debasing the U.S dollar and making our products cheaper on the international market. The logic is sound in assuming that price paid has a direct relation to the exchange rate. However, since 2007, the U.S. Dollar Index is down less than 5%. This doesn’t seem so bad on the surface until one considers that because the U.S. Dollar Index is trade weighted with more than 40% of its allocation going to the Euro currency futures, it doesn’t accurately reflect the Dollar’s value against the developing Asian nations and thus, the world.

 

United States’ businesses have made their profit margin through purchasing goods and services overseas at a favorable exchange rate and reselling them domestically for years. As a country, we have enjoyed our success for many years. During this process, we helped to develop an economic infrastructure overseas that we failed to remain competitive with domestically. The economies in these countries have continued to develop and strengthen and so have their currencies. We’ve seen the Dollar decline by more than 20% against the Indian Rupee and nearly 30% against the Japanese Yen since ’07. The Chinese Yuan/Renminbi is artificially capped by their government and has only been allowed to rise 7% against the Dollar over this same period.

 

The fact that the countries we’ve done business with for years are now stealing some of our economic thunder should come as no surprise. We’ve witnessed this story throughout history as cultures adapt new foreign technologies to their own use and use their production advantages of cheap labor, fewer legal restrictions and years’ worth of foreign direct investment to implement the same business plan in their own country, thus exploiting their own competitive edge in labor and capital, just like we did here, 100 years ago.

 

Productive land is the only production input with any upward price pressure. The inflation argument based on commodity prices is domestically tied to the agricultural land component of the economic equation. We have not seen inflation in labor as our own unemployment rate hovers under 10%. We have not seen inflation in the capital markets as the Federal Reserve Board recently committed to near zero interest rates for the foreseeable future. Finally, non- agricultural land has seen a crash in the housing market, which is being followed by the commercial market. Arable farmland and mineral deposits are the only sources of upward price pressure.  The growing middle class of India, China and other Asian nations is creating a consumption premium in the finite goods that must be grown or mined through their new found purchasing power.

 

Fortunately, we are able to benefit from the growing agricultural demand to help offset the years of domestic overspending. The United States still holds a strong lead in grain production. U.S. grain exports are on a tear this year and are expected to continue. China has been an importer of corn for the first time in 14 years and their soybean imports are up more than 5% from last year. We should be able to exploit this advantage as the developing middle class in India, China and the rest of Asia continue to move up the personal consumption ladder, which includes eating more of what they want and less of what they can afford. We will also see a surge in textiles and technology purchases as their disposable income climbs.

 

The net result of this is a changing shift in the floor prices for commodities as the world adapts to new levels of consumption and global production catches up. The old normal of $4 beans and $400 gold is long gone. The panic low of the economic meltdown in December of ’08 was $4.40 in soybeans and $700 in gold. Markets like corn and sugar never broke their upward trends. Currently, corn is supported by China’s continued imports while India remains the largest gold consumer.

 

The most compelling case, in my opinion, is in soybeans. Soybeans are fully supported by both China and India through solid demand in feed and cooking products. Technically, the soybean market has been trapped in a $2 sideways range for more than a year, trading between $8.75 and $10.50. Furthermore, as of January of this year, commercial traders, via the Commitment of Traders Report had actually accumulated, and held a net long position in this market until the recent test of the $10.50 highs. This implies that both soybean producers and end production consumers believe this area to be, “fair value.” Finally, we are on the cusp of the seasonally strongest time of year for the active soybean commodity futures contract. Therefore, any disruption in supply could generate a violent breakout higher, easily approaching $12.50 per bushel or, $10,000 per futures contract.

 

The United States will continue to benefit from our major advantage in farmable land and push it’s agricultural technology efficiencies to the utmost. Unfortunately, as a country, we would be lucky to cover 2% of the national debt through agricultural profits. A better personal finance option is to put the only source of domestic inflation to work by studying the markets themselves and learning how to take advantage of the supply and demand dynamics of a global agricultural imbalance.

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 in investing in futures.