Tag Archives: department of agriculture

Waning Demand in Orange Juice Futures

The orange juice market has rallied by more than 16% since June 25th and is now trading near $1.45 per pound. This marks nearly a complete recovery in prices from the sell off that was triggered by the late June, Department of Agriculture’s Cold Storage Report, which showed a 2% increase in inventories. Much of the rally that had led to the $1.55 high in May was due to speculative buying based on reports of, “citrus greening.” Citrus greening has been found in all of Florida’s main growing regions and leads to smaller oranges and less juice. However, Florida’s expected decline in production will be more than offset by other global issues, which will continue to pressure the market lower from these levels.

Global orange juice demand has been declining rapidly since the European economy began to collapse. The truth of the matter is that orange juice is a luxury good. Orange juice demand actually peaked way back in 1998 with global per capita consumption at 5.87 gallons per year. This amounted to a total supply of 1.8 million gallons or, 250 million boxes of raw oranges. The downward trend in demand has been tediously steady with 2008 providing the only uptick in demand over the last 15 years. Current consumption estimates stand at 3.85 gallons per capita or, less than 75 million boxes of total production.

The effect of the global decline in world orange juice consumption has taken its toll on the world’s largest exporter, Brazil. They are responsible for about 80% of the total world output. Their effort to gain market share from the U.S. over the last decade has led to a gross imbalance in the current marketplace. This has led to an about face in their agricultural strategy as the Brazilian government is expected to cull as much as 9% of total orange juice acres and redirect their efforts towards sugar cane which has a higher profit margin.

The macro trend of declining orange juice production is not lost within the commercial traders in the marketplace. Throughout the 1990’s and even into early 2000’s commercial traders were using the orange juice futures market to guarantee their supply. This means that commercial traders were generally net long and end line producers converting raw oranges into finished products were more concerned about high prices than they were about low prices. Therefore, spikes in commercial buying frequently led to long positions between 8,000 and 12,000 contracts. Most of these commercial buying splurges were followed by gains of more than 10% in the futures market, which shows that their actions have merit within the orange juice pricing structure.The last time commercial traders owned more than 12,000 contracts was in June of 2008. Keep in mind that this was the drought year and all agricultural commodities soared. Perhaps, the penultimate accumulation of more than 12,000 contracts is more instructive from June of 2004. This is when orange juice traded down to a multi year low of $.55 per pound. Currently, the commercial position is net long a mere 1,300 contracts. This tells me that end line producers have no fear of citrus greening affecting the overall marketplace. Furthermore, this tells me that they’re not worried about locking in future production at these prices.

The macro factors we’ve discussed lead us back to the current market rally, which I believe will act as a dead cat bounce. Therefore, we intend to sell the September orange juice futures contract upon the first sign of a reversal to head lower. The current rally appears to be overdone and we expect it to culminate in a momentum divergence that will cue our first entry. This short trade also coincides with the midsummer trough before fears of late summer hurricanes and early winter frosts cause orange juice futures to begin to bottom. As always, we will be protecting our position with stop loss orders placed just above whatever the high ends up being. After all, whether we’re right or wrong isn’t as important as capital preservation. Meanwhile, continually seeking out low risk, high reward trading opportunities will take care of capital appreciation.

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.

Buy the Atypical Mad Cow News

Mad cow disease comes in two forms, typical and atypical. The typical version is the communicable disease that results from improper animal husbandry and feed issues. The communicable type leads to Creutzfeldt-Jakob disease in humans. The human cases here in the U.S. were sourced to the consumption of British and Saudi Arabian products in 2003. The ’03 outbreak also marked the start of declining herd sizes as well as country of origin labeling.

Atypical bovine spongiform encephalopathy is a random genetic mutation that does not spread from cow to cow. This is the type that was discovered at a transfer station in Hanford, California this week and provided the catalyst for this week’s buying opportunity in live cattle futures. Its detection was due to the increased controls, labeling and testing methods put into place after the 2003 Canadian scare.

The definition of atypical by the Department of Agriculture suggests that this is a random mutation that occurred genetically. The key here is the reaction to the news. Based on our history, the images we’ve seen on TV and the Oprah Winfrey special in 1996 the knee jerk reaction has been to stop beef imports, quarantine the population it came from and eat more chicken. The 2003 episode, which saw one reported case of Creutzfeldt-Jakob’s disease, brought the Canadian beef market to its knees. Canadian cattle prices fell by more than 85% and led to the mass liquidation of approximately 20% of their animals to reduce the herd size and prevent further damage to the industry.

However, the response to the headline news is not always indicative of the true story. Atypical forms of this disease confine the issue to the individual animal. Therefore, neither the herd’s nor the public’s health is actually affected. In fact, cases of mad cow have declined from over 37,000 in 1992 to less than 30 in 2011. The controls and husbandry practices have dramatically improved in a business that is dominated by…..India!

Yes, India has the largest cattle herd in the world. India has nearly twice the cattle we have here in the U.S. It’s funny what happens when you search for global cattle herds rather than global cattle slaughter. I assume Indian cattle live longer. Mad cow is passed to people through the consumption of infected meat. Therefore, Brazil leads the pack at 10.7 million head processed and the U.S. comes in third at 5.7 million.

There have been eight reported outbreaks or cases of mad cow since the information age took hold. The last typical outbreak in the U.S. occurred in 2006 and sent prices plunging by 11%.  The average decline for an outbreak of the typical variety is 6.4%. The last observation was atypical and presented itself last March. The story unfolded with a knee jerk sell off followed by a rally, as the truth became known. The net market movement for the event was a rally of nearly 4%.

The current scenario is playing out in the same fashion. The day the news was reported, the market closed limit down. The following morning’s headlines included a ban on U.S. beef by South Korea, our 4th largest importer. This also comes at a time when we are actively trying to negotiate with Japan to lift their import restrictions on U.S. beef. Japan was our number one importer prior to the 2003 mad cow episode. Headlines being what they are, we’ll watch the market for signs of a turnaround and look to buy live cattle on this news induced sell off.

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.

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