Friday, January 29, 2010

Agricultural Update: Corn's 2010 Outlook

For agricultural reports on this blog, I will drop the "Debts of the. . ." title and replace it with the Agricultural Update title instead. It seems more fitting.

Corn Set To Rebound On Ethanol Demand, Economic Recovery

A flailing economy and record crops have worked to pull corn prices some
20% off their 2009 peak, but analysts say the move is only a temporary setback, with an economic recovery under way and ethanol demand on reliable footing. “Nearly a third of the domestic corn output in the U.S. is being used for ethanol production and this volume is set to expand even further,” Commerzbank analysts wrote in a recent research note. “This should push up prices.”

Ethanol—made primarily from corn in the U.S., since the nation is the world’s largest producer and exporter of the crop—is a fuel additive used in reformulated gasoline.

“This year, 12.95 billion gallons of renewable fuels are mandated to be used
in fuels sold in the U.S., up from 11.1 billion gallons in 2009,” said Brian Milne, refined fuels editor at Telvent DTN. While that mandated demand will not be satisfied exclusively by ethanol, “demand for ethanol will continue to rise with the mandate, which runs to 2022.”

Corn for use in ethanol production has already increased nearly fivefold from the year 2000 to 3.6 billion bushels in 2008, according to the National Corn Growers Association, which used preliminary data for 2008.

It wasn’t too long ago that ethanol demand was actually outgrowing corn
and risked—maybe even succeeded in— sending prices for corn and its byproducts, including feed for cattle, to unreasonable levels. Renewable fuels got a “bit ahead of themselves in the public eye in 2008 when gasoline was over $4 a gallon and the race to biofuels was on,” said Chris Kraft, president of “High fossil fuels lead to high demand for ethanol, which lead to historically high grain prices, which made ethanol as expensive as gasoline.”

In 2009, corn continued to be supported by expectations of increased demand for ethanol, as well as difficult growing and harvesting conditions that year—”too much rain followed by early cold and snowfall before all the crops were harvested,” said Milne.

Forecasts of a bumper corn crop have combined with the downturn in the
nation’s economy and falling oil prices to withdraw some of that support.
On Jan. 12, the U.S. Department of Agriculture raised its estimates on the
nation’s corn crops by 2% from its November forecast to a record level of
13.2 billion bushels. That’s 1% above the previous record set in 2007, the USDA report said.

Prices sank more than 7% the day the report was released and posted subsequent declines in eight of the 11 sessions thereafter. “Corn has been the darling of the funds and the focus of reallocation of moneys ... in the first week of January,” according to a report from commodity broker and researcher Linn Group. “Stats had been mildly supportive also—at least
a bull case could be built.”

But with the latest USDA production and usage report, “that story has evaporated,” the report said. “We ... look for a year of deteriorating corn prices with only strong energy prices to help stabilize this market at reasonable levels.”

Year-to-date, corn has posted the weakest returns among the major commodities, with returns of -10.3% as of Jan. 22, according to Deutsche Bank.

Corn futures prices have dropped from a $4.50-a-bushel high in June 2009
to trade recently at $3.60 on the Chicago Board of Trade.

Source: CME News For Tomorrow

Tuesday, January 26, 2010

The Debts of the Spenders: US Supreme Court Rules Corporations are People Too

Here are the views of the ABA Task Force on Financial Markets Regulatory Reform. It was presented to Congress this week.

For those who do not know, the ABA (American Bar Association) is an extremely influential and powerful lobbying group in Washington DC. The ABA is dominated by the interests of Big Law firms, most of whom have vested interests in the promotion of the status quo from their wealthy clients (e.g. maintaining lucrative contracts with Wall Street) and who themselves are big donors to US politicians.

Before reading this, I'd like readers to consider the comments in this context. The US Supreme Court (the highest court in the land) recently passed a decision that effectively ruled Corporations are people with the same powers of speech reserved for individuals when it comes to making political donations.

WASHINGTON — Overruling two important precedents about the First Amendment rights of corporations, a bitterly divided Supreme Court on Thursday ruled that the government may not ban political spending by corporations in candidate elections.

The ruling, Citizens United v. Federal Election Commission, No. 08-205, overruled two precedents: Austin v. Michigan Chamber of Commerce, a 1990 decision that upheld restrictions on corporate spending to support or oppose political candidates, and McConnell v. Federal Election Commission, a 2003 decision that upheld the part of the Bipartisan Campaign Reform Act of 2002 that restricted campaign spending by corporations and unions.

The ruling represented a sharp doctrinal shift, and it will have major political and practical consequences. Specialists in campaign finance law said they expected the decision to reshape the way elections were conducted. Though the decision does not directly address them, its logic also applies to the labor unions that are often at political odds with big business.

Translation: US corporations may spend an UNLIMITED AMOUNT OF MONEY on politicians.

Monday, January 25, 2010

The Debts of the Spenders: FDIC Considers Granting AAA Status to Mortgage Bonds

*Credit Gato.chan

Take special note of the last line in this article. Is this going to shape up as yet another "extend and pretend" solution to the credit crisis?

Or will this be a juicy opportunity for arbitrage traders to take advantage of the yield between low interest treasuries and higher yielding assets.

Do I hear another Bill Gross play on MBS?

“The FDIC is going to be a big issuer in the securitisation markets this year,” said Christopher Whalen, managing director of Institutional Risk Analytics. “This could lead the way in terms of recreating the securitisation market, as the FDIC deals could end up being the new template.”

Friday, January 22, 2010

The Debts of the Lenders: Why China Cut Bank Lending

Very informative. Please watch the whole video. A city built for 1 million people. And virtually unoccupied.

This is the most (in)famous project. But multiply similar projects like these all throughout the country and you will begin to get an understanding of the scale of the problem. Macro-economic slack has resulted in the government force-feeding the low wage light manufacturing and infrastructure sectors.

This is great news for exporters but poor news for consumers - few of which can afford the shiny new things in their midst. Until China focuses on building its consumer class and relying on low wage serf labor, there is no way that the country can pick up the global slack from the West.

Wednesday, January 13, 2010

The Debts of the Lenders: China Allows Short Selling

Although it is only a trial run, the Chinese authorities have taken a much needed step in the right direction by allowing freedom of capital to migrate in both directions instead of only up. The move is aimed at increasing arbitrage opportunities between the mainland A shares market vs the H shares in Hong Kong.

Short sellers add much needed breadth and scrutiny to a market by increasing liquidity. Lower brokerage fees and commissions are just one byproduct. Most importantly, short sellers act as an external check on corporate malfeasance and weakness by exposing dark deeds to sunlight.

The Debts of the Spenders: Bernanke vs the Taylor Rule

Was the Fed too accomodative? Not enough? Have no idea what I'm talking about?

Read here:

A bit wonkish but a good read nonetheless.

Sunday, January 10, 2010

The Debts of the Spenders: How the USA is Becoming More Like the Eurozone

The number of US government employees has grown steadily over the past 70 years since the end of the Great Depression. The same cannot be said of the private sector. Another way to examine the situation is to realize that as private productivity increases, the workers in those respective industries inevitably pave the way forward for their own eventual layoffs.

Saturday, January 9, 2010

The Debts of the Spenders: 50 States of Disunion?

*With credit to Jeff Bernstein of Urban Digs.

I have added a few of my own comments below in the last section.

So, just how bad are individual state finances in the USA? See for yourself here and here.

According to the National Conference of State Legislatures "Ironically, a contributing factor to future state budget gaps is the end of federal stimulus funds provided by the American Recovery and Reinvestment Act (ARRA). Those additional funds supported state budgets in FY 2009 and, to an even greater extent, in FY 2010. That money recedes in FY 2011 and, when it is gone, will leave big holes in state budgets—what many state officials are calling the “cliff effect.”"

Despite this bearish data ISM data is improving. And the numbers have been growing steadily for the past few months of 2009. In fact, we are already back to 2006 levels!

I am going to say a few heretical things here. Long time readers will note a departure from the traditional bearish tone on unemployment and personal consumption which are lagging indicators. But we've got bullish data coming in from inventory re-stocking. Of course a lot of this is federal money but it looks like Keynesian spending may work - short term at least. Let us also not forget the Census 2010 hiring spree ongoing. It's going to give a big bump to NFP in Q2.

Tuesday, January 5, 2010

The Debts of the Lenders: 2 Year Note Recovers in Mid-Week

I went in too early and got hit - still underwater - but this was a nice rally in bonds (yield is inverse to price).
Bloomberg covers the story here. The short trade got too crowded.
A JPMorganChase & Co. survey showed that investors who are short the Treasury market was at its highest level since March 2007. The pending home sales data show housing may be at risk of weakening when homebuyer incentives, which were extended in November, expire later this year. Unemployment close to a 26-year high and weaker consumer finances remain hurdles to a sustained acceleration in home sales that would help fuel the economy.