Tag Archives: crop

Paradigm Shift in the Cocoa Futures Market

Cocoa futures are one of the most volatile markets. This has been primarily attributed to three historical variables politics, antiquated farming methods and weather. Two of these three variables are being addressed directly while the third remains a wild card that may pull the trigger on a substantial rally in an agricultural market undergoing a complete paradigm shift.

The Ivory Coast is the world’s largest producer of cocoa. Prior to 2011 it was presided over by Laurent Gbagbo who ran the country in typical West African fashion for more than 10 years. The open elections of 2011 led to a brief civil war when Alassane Ouattara was elected President and Laurent Gbagbo refused to cede the Presidential office and used his cronies in the military to hold off the inevitable. The regime change was inevitable because Ouattara, who is a former International Monetary Fund (IMF) economist, has the full support of NATO as well as the military backing to support a more democratic and transparent government. The installation of Ouattara should eliminate much of the political volatility that has been a hallmark of the cocoa futures market for many years.

President Ouattara, who was educated here in the U.S. at Drexel University, is quickly modernizing the Ivory Coast’s cocoa markets. There’s been rapid development in soil reclamation, fertilization and education. Most cocoa is grown by individual farmers on small plots of land and is harvested by hand as it has been for hundreds of years. The application of modern agronomy techniques will cause the Ivory Coast’s cocoa production to increase rapidly over the coming years. The combination of infrastructure improvement and political stability supporting free trade and as well as modern farming practices will increase yield and depress prices once the changes are fully implemented.

The effects of Ouattara’s Presidency can already be seen in the decline of volatility in cocoa prices. Major chocolate producers no longer have to worry about civil war, the government closing ports or henchman attacking farmers on their way to collection stations to force the price higher. The price range in 2012 was $2,003 – $2,707, a measly 35%. The range for 2011 was more than 90%. In fact, the five-year average range is more than 50%. These wild rides are less likely to occur, as weather becomes the only variable left to move the markets.

This sets the stage for the current battle in the market. Cocoa futures have been on a steady slide since fall. The market appeared to be forming a technical bottom during this period. However, it was clear by the commercial selling that the bullish saucer base pattern, between $2,310 and $2,510, that had been supported by the small speculators had little chance of pushing the market higher. The slide through the 2013 price level is primarily attributable to the small speculators being forced out of their long positions at a loss.

The market has recently traded as low as $2,100. Commercial traders have been covering their short hedges and locking in futures supply line purchases since the market first fell through the $2,310 level. Commercial traders have been net buyers in nine out of the last ten weeks. Recently, weather issues have reduced estimates for the current mid crop harvest due to a lack of rain throughout the Ivory Coast as well as growing regions in Ghana, the second largest producer. These two countries account for nearly 60% of the world’s production.

The key price level is $2,000 per ton. The market traded below here once in 2011 and rallied $500 per ton in just a few weeks. Overall, the market hasn’t spent any time below $2,000 per ton since the commodity boom of 2007. We’ll side with the commercial traders and look for buying opportunities as the last of the weak speculators are forced out of the market. Perhaps, the best way not to miss out on the rally is to place a buy stop order above the market’s recent resistance level around $2,150. If this order gets filled in the May cocoa futures contract, place a protective sell stop at what becomes the low price of this move. We’ll look for a minimum price target of $2,310, the bottom of the old saucer formation.

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.

Food or, Fuel?

Corn is facing unprecedented demand on all fronts. The USDA
reported that prospective corn planting for 2011 is expected to be 5% higher
than last year. That would make this the second largest crop planted since
1944. The 92.5 million acres is second only to 2007’s record of 93.5 million
acres. In spite of the growing acreage in corn and higher yields driven by
greater technology, corn stocks are still down 10% from this time last year. In
fact, the corn on hand versus this year’s expected demand, (stocks to usage
ratio), stands at 5%. This is the lowest number since 1937. There are currently
6.5 billion bushels of corn in storage versus global demand of 123.5 billion
bushels.

The government’s push towards ethanol was actually initiated
by Carter during the oil crisis of the 70’s. It was left dormant until the post
9/11 energy independence push. Corn was trading at $2.25 per bushel in 2001.
Cheap, clean burning corn made it a political win/win for energy independence
and the global warming, green energy crowd. This led to government mandates and
subsidies to increase ethanol production every year through 2015. This year, up
to 40% of the corn crop, at a price above $6.50 per bushel, will be allocated
to ethanol production. If we multiply the intended planting acreage times an
average yield of 155 bushels per acre, we can see that the cost of the corn
input of ethanol production will be more than $37 billion dollars.

The U.S. also exports more than 60% of the corn we produce. Our
exports have continued to climb even as the price of corn has nearly doubled in
the last year alone. Meat consumption has just begun to grow in Asian countries
as they’ve begun to prosper and develop their own middle class. This will not
only continue, it will accelerate. Global meat consumption is still only 20% of
the U.S. average. The demand for feed grains continues to outpace production by
1-4% per year. China is determined to have a self -sustaining hog industry by
2013. These factors help explain the continual decline in ending stocks in the
face of growing harvests.

The demands on the corn market from ethanol and food
production leave absolutely no room for weather related issues. This year’s
crop is crucial to restoring our reserves. Based on the current ethanol
policies, it would have to rally another $.50 cents per gallon just to catch up
with the current price of gasoline. Corn would have to reach $8.82 per bushel
for gas and ethanol to reach equilibrium at $3.15 per gallon. Ethanol/ gasoline
blenders also receive a federal credit of $1.30 per bushel. This pushes the break-even
corn price to $10.12 per bushel for ethanol producers.

The price of corn hit an all time high of $7.79 in June of
2008. Remember, this followed the largest crop ever harvested in 2007. We
already know that global gasoline demand will increase, as fuel must be
exported to Japan. We also know that Japan’s imports of all foods will be
higher than ever. China is doing everything they can to put the brakes on their
economy but it won’t derail the growing appetites of their people. Finally, the
continued decline of the U.S. Dollar will serve as double coupon day for global
shoppers as we remain the world’s supermarket.

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.

Sugar Tops 2010 Commodity Market Volatility

It’s been a banner year for commodity markets as many of them have witnessed unparalleled growth. The one sided movement in many markets in 2010 has made commodity funds quite favorable as they are only able to invest through the purchase and ownership of their respective niche markets. However, long only commodity funds and Exchange Traded Funds miss out on one of the biggest advantages of trading commodities. That is, the ability to sell a market short and profit from an anticipated decline in prices.

Commodity contracts have set expiration dates. This makes them a very good short- term trading tool because speculators have to even up their positions prior to the contract’s expiration and we can track their actions through the commitment of traders reports. Only producers who intend to deliver their product and end line users of commodities stay in the markets until expiration. Some markets like  crude oil, trade all twelve calendar months. Other markets are delivered quarterly like foreign currencies and stock indexes. The sugar market also has four delivery dates per year. However, they’re not evenly spread out with the contract for March delivery becoming the actively traded contract in October.

The combination of being able to profit in a declining market as well as the uncertainty caused by sugar’s unique expiration cycle as well its relatively recent but substantial use in ethanol has made the sugar market, yes, the sugar market the single most volatile commodity market of 2010. In the commodity markets, volatility equals opportunity. In order to make money in any market, there has to be price movement. The fact that the commodity markets can be traded from both sides provides twice the opportunity. No market has illustrated that opportunity like the sugar market in 2010.

Sugar had rallied throughout 2009 on expectations of a small Indian crop due to a late and insufficient monsoon season hampering their output while Brazil’s was constrained by just the opposite problem. They had too much rain. Brazil’s overabundance of precipitation was hindering their harvest and slashing their yields. Brazil and India are the world’s top sugar producers respectively accounting for more than half of global production. These production concerns came with the pressures of growing a Chinese demand that has nearly doubled in the last ten years and outstripped its own domestic supply in 10 of the last 12 years.

Due to these pressures, 2010 saw the sugar market begin the year at levels not seen since the 1970’s. It’s important to note that sugar is basically a weed, like wheat. Its recuperative powers are stunning, given the right conditions. Therefore, the sugar market that found itself with tight supplies and a dwindling new crop came to experience some decent weather and a stunning recovery. In fact, the Brazilian crop that makes up nearly half of the world’s market and was perceived to be in such dire straits had actually recovered most of its anticipated yield.

The rapid recovery of the crop along with added acreage planted for the coming year quickly caused prices to plunge. The long only global commodity funds were forced to liquidate their positions on the way down. Their disclosure documents require them to maintain proper portfolio allocations, which causes them to buy more on the way up and sell on the way down. Their liquidation further depressed prices and the decline became a race to the bottom. Unlike long only funds, individual commodity traders as well as commodity trading advisors had the flexibility to participate and profit from the market’s decline. The price of sugar lost more than 60% between February and April of this year. This decline was fueled further by a Brazilian report that expected production to be 10% greater than the previous year.

The month of April saw the sugar market consolidate tightly in anticipation of the World Agriculture Supply and Demand Report. These reports are published monthly but the April report is an important one for the sugar market because it is the best reference of planted sugar for the coming crop year. The surprise in this report was a global uptick in demand to the tune of 5.3%. Considering the acreage came in as expected, the uptick in demand more than offset the added acres planted due to 09’s average sugar price. This was enough to reverse the course of the market.

Following May’s World Agriculture’s Supply and Demand Report, India stated that it was going to tax sugar exports to shore up its domestic supplies. Furthermore, the U.S. Dollar’s decline led to increased sugar purchases on the open market as foreign countries could now make purchases on the open market to satisfy the demand generated by their growing middle classes at a discount.

The effect of the falling dollar, a growing overseas middle class and tight global supplies have taken the sugar market from its final low of 11 ½ cents per pound up to a current price of over 33 cents per pound. All told, the sugar market started the year at generational highs around 28 cents per pound. The market then plummeted to a low of 11 ½ and has currently rallied to prices not seen in 30 years. As a comparison, gold would have to trade to $3,300 per ounce to match sugar’s high or the Dow Jones Industrial Average would have had to fall to 4172 to match the sugar market’s February to April decline. Trading of any type requires price fluctuation to make or, lose money. The ability to trade both sides of the market increases the number of opportunities. Volatility is the measure of price fluctuation and the sugar market is its poster child.

Lost in the Confusion

Lost in the Confusion

 

Amid the roar of the financial chaos and their ability to affect,
seemingly every market, one sector has been quietly building a base and should
be renewing buying interest. Remember back in late May and June during the
wettest spring ever when the concerns of crop planting were making the local
news? The ensuing run up in grain prices soon had everyone beating the drum of ethanol’s
demand on corn prices and the cost of bread, chips and cereal.

Since the grain markets peaked in July, many of them have
sold off considerably. Soybeans have fallen from an all time high of $16.47
down to $11.00 per bushel. Corn and wheat are also off 30 – 35%. The main
reasons for this sell off has been the exceptional growing conditions helping to
make up for the wet spring as well as the typical seasonal pattern the grain
markets have of selling off once the crop has been planted. Further pressure
was added this summer by the rise in the U.S Dollar and the global demand
reduction associated with increasing purchase costs as a result of the exchange
rate.

Soybeans and wheat continued to decline this past week amid
the global uncertainty of the financial markets and a general flight from
derivative based investment. However, corn made its low of $5.00 per bushel
more than a month ago. Also, the corn market failed to make new lows amid the
financial panic. Technically, corn need only close above $5.67 to setup a
genuinely bullish breakout of a double bottom.

Fundamentally, while the corn crop has grown well, the late
planting has had an effect on the maturation process of the crop. The saying
being floated by the corn pundits is, “Looks good from the road but not in the
field.” This year’s crop will be especially vulnerable to an early frost or
cool late summer as the late planting is affecting the finishing of the crop.
Lastly, and most importantly, the global corn crop began this year at one of
the tightest stocks to usage ratio on record. Basically, this means that there
was less of the previous year’s corn crop still available in the pipeline at
the beginning of this year’s planting season.

It appears in the USDA grain reports that given the acreage planted, the projected
yield and demand for this year’s crop will do little to ease this issue. While
we move to global “on demand inventory,” it’s important to know that commodity futures
supplies are static. Government’s can print money. Stock exchanges can forbid
short selling and banks can be bailed out. However, neither the U.S. Federal
Reserve nor the European or English Central Banks can create more corn. Those
who have been losing sleep over the next financial market, “Breaking News
Bulletin,” may wish to consider something more grounded.

 

Andy
Waldock

P –
866-990-0777

F –
419-624-0937

www.commodityandderivativeadv.com

Corn Crop Deterioration

The fundamentals f the corn market continue to point towards higher and higher prices. I understand that many people had a hard time forcing themselves to buy new crop corn $6 a bushel. Unfortunately, $7 is here and $7.50 is not far off. The corn market is experiencing a “perfet storm.” The short list of contributing factors are:1) Tight ending stocks leave us very dependent on this year’s crop.2) Increasing global (Asian) demand for red meat funnels more corn to feed.3) Declining Dollar increases global demand for our exports.4) The late start to this year’s crop will have a material effect on yields.5) Growing position of index trader positions in the Commitment of Traders Report.

The following article on Bloomberg goes into more detail without having to source each piece of the puzzle individually. If anyone wants more detail than it provides, please contact me directly.

Corn Deluged by Iowa, Illinois Rain Cuts Yields, Boosts Prices

By Jeff Wilson

Enlarge Image/Details

June 10 (Bloomberg) — Rainstorms sweeping the biggest corn states in the U.S. are damaging a crop that’s already failing to keep pace with global demand for food, fuel and cattle feed.

Farms in Iowa were drenched with 5.78 inches of rain last month, or 37 percent more than normal, according to :S:d1″>Harry Hillaker, the climatologist for the biggest corn-growing state. The 22.23 inches that fell on Illinois from January through May was 45 percent above normal and the third-wettest on record, according to data compiled by the state.

Corn rose to a record $6.73 a bushel yesterday in Chicago, extending this year’s gain to 44 percent. Yields in the U.S. may fall 10 percent short of government forecasts, the biggest drop in 13 years, and send prices up another 34 percent as storms delay planting, stunt growth and leech fertilizer from the soil, said :S:d1″>Terry Jones, who farms more than 6,000 acres near Williamsburg, Iowa.

“It’s already a disaster,” said :S:d1″>Palle Pedersen, an agronomist at Iowa State University in Ames.

About 60 percent of the crop in the U.S., the world’s largest grower and exporter, was in good or excellent condition as of June 8, down from 63 percent the previous week, the Department of Agriculture said yesterday in a report. A year earlier, 77 percent got the highest rating. Iowa, Illinois, Nebraska, Minnesota and Indiana, the five top-producing states, reported declines.

`Midwest Flooding’

Check USDA Grain Reports

Rainfall across the Midwest was as much as four times normal over the past 60 days, according to National Weather Service data. In some places, storms dumped 15 inches more than average, the data show. The increase is equal to the typical rainfall some fields receive in a year, said :S:d1″>Roger Elmore, who is also an agronomist at Iowa State.

“The Midwest flooding is widespread and that has already hurt the crop,” delaying development and drowning some immature plants, said Jones, who is vice president of Russell Consulting Group in Panora, Iowa. “We could see national yields fall at least 10 percent, even with normal growing conditions the remainder of the year.”

Spring planting was delayed by rain and unusually cool weather that left fields too muddy for tractors and limited growth. U.S. corn planting was 51 percent completed by May 11, less than 71 percent the previous year, USDA data show.

The yield potential for corn drops unless plants emerge from the ground before the end of May in the Midwest, according to a University of Illinois study. The USDA estimated 78 percent had emerged as of June 1, compared with 92 percent a year earlier. To produce the best yields, corn needs to pollinate before the arrival of summer weather.

$8 a Bushel

“The crop is in serious trouble,” said :S:d1″>Jim Stephens, president of Farmers National Commodities Inc. in Omaha, Nebraska, who helps manage more than 3,600 farms across the Midwest. He said corn will top $8 a bushel this year.

The weather is endangering a U.S. crop already expected by the USDA to decline from last year’s record harvest after farmers planted 8.1 percent fewer acres. Global inventories may fall to the lowest levels in 24 years by Aug. 31, the USDA said.

U.S. farmers shifted to soybeans and wheat because the costs of corn is high relative to other crops. The USDA will update its yield and inventory estimates today in Washington and its estimate of U.S. planted acreage on June 30.

Demand for corn to feed livestock jumped 24 percent in the past decade as economic growth boosted incomes and meat consumption in developing countries. The prices of corn, soybeans, rice and wheat surged to recor
ds this year as food demand outpaced production. In the U.S., the cost of corn was increased by government subsidies and mandates for ethanol.

Rising Prices

In the top eight producing states, which grew 75 percent of last year’s crop, there is more acreage at risk than in 1993, when yields plunged 23 percent, said :S:d1″>Chip Flory, editor of the Professional Farmers of American advisory in Cedar Falls, Iowa.

Corn futures for July delivery rose 6.5 cents, or 1 percent, to $6.5725 a bushel yesterday on the Chicago Board of Trade, after touching a record high for a third straight session.

The saturation of soil moisture is in the 98th percentile of the highest levels in the past 40 years from South Dakota to Ohio, according to government data, increasing the risk of reduced yields from the loss of nitrogen fertilizer, Iowa State University’s Elmore said. The saturated soils are depleting fertilizer at a rate of as much as 4 percent a day, he said.

Farmers were expected to produce about 153.9 bushels an acre on average, up from 151.1 bushels last year, the USDA said May 9. Instead, yields probably will drop below 139 bushels and may fall even more, said Jones, the Iowa farmer.

To contact the reporter on this story: :S:d1″>Jeff Wilsonjwilson29@bloomberg.net