Thursday, April 28, 2011

Argentina Moves to Limit Foreign Speculators in the Agricultural Space

A few posts ago I noted the trend by agriculture rich governments to limit foreign ownership by speculators of cropland. Here is the latest update from Argentina, the second largest producer of soybeans after the USA and an important source of cattle and wheat as well. Most moves of this nature are aimed not so much as the small investor but large foreign funds - including sovereign wealth funds - namely Chinese and Middle Eastern ownership.

Argentina Pres Sends Congress Bill Limiting Foreign Land Ownership
Argentine President Cristina Fernandez has sent a bill to Congress placing strict limits on the amount of farm and rural land that foreigners can purchase, throwing cold water on a wave of foreign buying of farmland in the agricultural powerhouse.

Under the proposed bill, foreigners will be limited to buying 1,000 hectares (2,500 acres) each and a nationwide survey will be conducted to ensure that no more than 20% of the country's total rural area is in the hands of foreigners, Fernandez announced.

Existing landholdings held by foreigners will not be affected, Fernandez said.

Source: CME News For Tomorrow

Tuesday, April 26, 2011

China's Cheap Vegetable Problem

Followers of all things China related will not be surprised to know that it is suffering from major inflationary problems. However, readers may be surprised to know that China also has an abundant supply of food, namely cheap vegetables. So much supply that in fact, farmers are leaving their crops to rot in the fields.

China's Cheap Vegetables Problem
When China suffers inflation, food prices are always a significant part of the problem. But the conundrum China's leaders face with this latest round of inflation is somewhat bizarre: While the country's consumer price index is running at a near three-year high, vegetables are so cheap that tons and tons of them are being left to rot away in the fields.

Of course, vegetables are still expensive in the cities, and only in the cities, and that's exactly where the problem is. According to the official Xinhua News Agency (in Chinese), fat, juicy Chinese cabbages are selling at one yuan per 500 grams in city markets -- ten times the price the cabbage growers can fetch in the countryside.

Why, with urbanites paying such princely sums, are farmers leaving their cabbages on the ground? Because middlemen, transportation companies and the government itself are pocketing the bulk of the price differential.

Logistics-induced costs accounts for two thirds of the total cost for vegetables nationwide, Zhou Wangjun, vice director of the National Development and Reform Commission's price section, is quoted by Xinhua saying.

It turns out the problem isn't limited to produce. Referring to official statistics, Xinhua also said logistics-related costs constitute as much as 21.3% of China's gross domestic product, compared with just around 10% in developed countries. In a rather baffling example, Xinhua said it costs between 6 and 8 yuan to move one kilogram of goods via land transport from Shanghai to Guizhou, a province in the southwest, while it costs only 1.5 yuan to fly the same amount from Shanghai to New York.

According to estimates by Wang Tongsan (in Chinese), a researcher at the Chinese Academy of Social Sciences, 82% of the world's toll-charging highways are in China, with road tolls accounting for as much as 50%-70% of logistics costs nationwide.

In the current climate, the logistics squeeze has had dire effects on more than just urban grocery budgets. Earlier this month, according to a report in the China Economic Times (in Chinese), the recent plunge in vegetable prices triggered the decision of a farmer in Shandong province to end his own life.

Transport-related charges, some of which are a result of arbitrary decisions by local governments, also were at the heart of a trucker strike that gummed up Shanghai's large container handling ports last week. The strikes fizzled out yesterday as authorities pledged to cut some of the fees and offered new relief to the truckers.

Economic officials and central bankers in Beijing have repeatedly stressed the importance of managing inflation expectations in the country's fight against rising consumer prices, but the vegetable price dilemma is a stark reminder that taming the China's inflation tiger won't be so easy.

Source: CME News For Tomorrow

Monday, April 25, 2011

USDA Raises Food Inflation Outlook Again

Fresh from raising its price outlook on the grains, the USDA has now expanded its inflationary view to include staples such as beef, pork, and even fresh vegetables. Unsurprisingly, some analysts believe the government is understating the scale and scope of food inflation. High prices on essentials such as food act as an implicit tax on consumer consumption in non-discretionary areas.

USDA Raises 2011 Beef, Pork, Vegetable Price Forecast
The U.S. government raised its forecast for retail prices of beef, pork and fresh vegetables, but left its overall food-inflation forecast for 2011 unchanged.

The overall food price-inflation forecast held steady at 3% to 4%, the U.S. Department of Agriculture said in its monthly analysis of the U.S. government's Consumer Price Index for food, which tracks retail prices of everything from milk to cooking oil and steak. But within the report, there are signs that inflationary pressures are approaching the high end of that range, thanks to higher energy costs and the 10-month-long rally in the price of grains.

Retail beef prices are forecast to jump 7% to 8% in 2011, up from a March forecast of 4.5% to 5.5%. The USDA also projected that retail pork prices will climb 6.5% to 7.5%, an increase of one-half percentage point from the prior month.

While several categories within the CPI showed higher inflation, those categories are weighted and weren't enough to push the overall food-inflation forecast beyond the 3% to 4% range.

Still, some private forecasters said retail food prices are climbing more sharply than the USDA is willing to forecast. Michael Swanson, an economist at banking giant Wells Fargo & Co., said Monday that he expects the government's CPI for food to climb 4.5% to 5.5% in 2011.

"There just isn't a single major food category where prices aren't climbing," he said.

Such a sharp acceleration in retail food prices would be a big change from last year, when the CPI for food rose just 0.8%, the mildest food-inflation rate in 48 years. Last year, many food manufacturers and supermarket chains choose to absorb their higher costs rather than attempt to pass them along to consumers worried by the stubbornly high unemployment rate.

For now, food retailers are passing through increased commodity costs, which "could temporarily boost profits across the value chain," Janney Capital Markets said in a note to clients. But ultimately inflation, coupled with consumers balking at higher prices, could pressure retailers' margins as the year progresses, the firm said.

Livestock prices have soared in recent months at the Chicago Mercantile Exchange, driven largely by sharply higher feed costs and expectations of shrinking animal supplies. Prices of cattle futures contracts hit an all-time high in early April, while lean hog futures hit a fresh record last week.

The U.S. cattle herd stands at a more-than-five-decade low, while the U.S. breeding herd for hogs is just above all-time lows.

Meanwhile, grain prices have rallied since last summer on strong demand and disappointing crops around the world that have depleted supplies.

Consumers of fresh produce are also feeling the sting. The USDA projected that prices for fresh vegetables will increase 4.5% to 5.5% this year, up from a prior forecast of 4.0% to 5.0%.

Lettuce, which has been affected by freezing weather in Mexico and Arizona, cost 27.3% more in March than it did a year ago, according to the USDA. Potato prices are up 12.1% during that period and tomatoes are up 10.6%.

The USDA also raised its projected price increase for fats and oils, increasing it to 6% to 7%, up one percentage point.

Source CME News for Tomorrow

Are Precious Metals Overbought? Backwardation, Contango, and their Place in Levered ETFs

Are precious metals such as gold and silver overbought? In particular, silver's dramatic rise of over 25% in 10 trading days has given even the most bullish room for pause. Levered ETFs based on underlying gold and silver have risen even more dramatically and are currently trading in the mid-triple digits.

The key to determining mkt direction on the levered ETFs is determining whether or not the underlying is in contango or backwardation. This was the key to trading SKF, FAS, FAZ, and the other levered ETFs. It applies to both bull and bear etfs.

This is b/c no underlying - especially w/commodities - can ever offer a positive roll yield. Inverse etfs (aka the shorts) have a positive roll yield when the underlying is in contango. Bullish etfs on the other hand have a positive roll yield when the underlying is in backwardation.

Backwardation refers to a situation where the underlying's spot price is much more than the futures price. A perfect example is the commodities market now for grains (corn, wheat, soybeans). Contango refers to a situation where the future price of the underlying is more than the present. Perfect examples are Vix call options now and oil in 2009 when it was trading at $65/barrel.

A) Contango
Because the normal course of the underlying futures contract in a market in contango is to decline in price, an inverse fund composed of such contracts sells the contracts at the high price (going forward) and buys (closes) out later at the usually lower spot price.

This was the case of SKF, FXP, SRS and the other levered bear funds in late 2008-early 2009. Markets kept on closing consistently lower, week after week, month after month.

The opposite is true for bullish funds.

B) Backwardation

Because the normal course of the underlying futures contract in a market in backwardation is to increase in price, a bullish fund composed of such contracts sells the contracts at the high price (going forward) and buys (closes) out later at the (usually) lower price. But wait! I said usually. What if the underlying STILL remains in backwardation, month after month, expiration after expiration? The
underlying will continue to rise and in a levered etf it will take off like a rocket ship to the moon. This is why the silver 2x ETF, AGQ, is flying so high now.

As with any commodity, backwardation usually implies some shortage of physical supply. Not just a shortage. An extreme shortage.

C) Margin, Interest Rates, and CFTC Position Limits

Interest rates play a role too. When interest rates are low (like now) it becomes cheaper for funds to physically store and insure the metals.

Exchanges also periodically raise margin requirements when they think a commodity is getting too "hot". On the short side, we last saw this w/the inverse ETFs back in 2008-2009 during the SEC's notorious shorting ban (remember that? over 1000 stocks were deemed "financial companies"). We are seeing it this time on the bull side w/the CME raising margin requirements for oil, wheat, and corn. For precious metals, the CME has hiked margin requirements 4x already w/in the span of 1 year.

Nor is the USA alone in raising margin requirements. China also recently lifted margin on its own contracts in Shanghai by 3%.

Index funds and ETFs are the new, huge players on the commodities scene. Not hedgies and not investment banks. Everybody knows these massive funds' trading strategy: When a contract comes to expiration, they roll their contracts and buy long again (if bullish) or sell again (if bearish), regardless of what the price is. Under the
Dodd-Frank Act, position limits on derivatives are to be imposed by the CFTC.There have always been position limits in place. But they've not had either aggregate-month or all-month, or back-month limits. These ETFs and index funds are responsible for buying or selling (but more buying b/c bullish funds have more exposure and
capital) huge amounts and adding to volatility.


A fund's NAV, or net asset value, also plays a role in determining market direction. NAV is defined as the per-share dollar amount of the fund which is calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding. Levered ETFs frequently trade at a substantial premium or discount to their NAV value. Potential signs of overheating or cooling include double digit premiums.

E) Putting it all together

Sustained backwardation in any commodity is rare. It implies a physical shortage and thus a tremendous bull market. Silver is now in backwardation. Gold is leaning towards it but remains slightly neutral.

You can find out at a glance how slanted the backwardation or contango a commodity is by going to the CME's web site. This is silver's

I do not associate backwardation with possible topping, I associate STEEP backwardation with possible topping. When I notice a steep backwardation curve I don't have to get short immediately (but will definitely pay close attention other technicals )AND will wait the curve to flatten out in the direction of contango. This is a contrarian signal.

F) Implications for the Dollar

The danger signs to watch out for is if gold slips into as strong backwardation as silver. If it does, then its all over for the $. There is basically uncharted territory below 71 (summer 2008 lows - also when oil peaked at $145/barrel). This was the low on a 10 year chart (2001-2011).

If you think that the US govt is going to default or go into hyperinflation, then keep any gold or silver you already own. But I'm getting ready to bet the other way. The US will not turn into Zimbabwe w/in the next few months and will act to tighten monetary policy.

G) Conclusion

Any signs that the market is reverting to contango (when futures are more expensive than the spot price), COMBINED W/bearish technicals, should be a yellow light for bulls to cash out and a potential sign for bears to begin easing into a short position.

Saturday, April 16, 2011

Federal Reserve Official Outspoken on Inflationary Effects of Quantitative Easing

There is at least one Fed official who can see the light beyond the shadowy gloom of the Federal Reserve's liquidity operations. Thomas Hoenig, FRB President of Kansas City, has been an outspoken dissident among the reigning policy chiefs. His position in the nation's farm belt has given him a much clearer view of the inflationary effects of the central bank's actions on food and fuel prices. On Friday afternoon, he noted with dismay the surging land price of farm land and agricultural commodities.

"We can extend the boom, and make the bust more difficult," Hoenig said at a panel discussion on food prices at Purdue University.

He said that interest rates can't stay near zero forever, and that investment in farmland is "gambling."

Hoenig, scheduled to give a lecture later Friday, also said that worries about inflation should extend beyond the core Consumer Price Index, which doesn't include food or energy.

"I think it is an error to look at just core inflation, except for a very short period of time," he said.


Tuesday, April 12, 2011

US Drought Affecting Farmers in the Southwest

Wheat and cattle supplies are under threat from drought.

Fierce Drought Hurts Farmers In The Southwest
A scorching drought in much of the Southwest is hurting farmers across several states and potentially crimping supplies of crops and cattle.

In Texas, where the past six months has been the driest such period on record since 1967, more than half of the state is parched by extreme drought, according to the Drought Monitor, a compendium of government and academic estimates.

New Mexico, too, is drying out, with almost 75% of the state in a severe drought, the monitor shows. In Oklahoma, the period between January and March was the driest since 1921, including the 1930s Dust Bowl years, said the state's associate climatologist, Greg McManus.

Parts of the southern U.S. have battled drought on and off since 2006, but this year is shaping up to be particularly bad, because of an exceptionally dry winter and spring, when the region usually receives more rain.

The drought is hitting the Southwest at a time of rising commodity prices that have attracted the attention of policy makers in the U.S. and elsewhere. Because of the sizable agricultural industry in the Southwest, a decline in production could exacerbate an already tight supply situation.

Forecasts call for less-than-average rains in Texas and New Mexico in the next three months, and at least for the next month in Oklahoma, according to climatologists in those states. In response, at some of the country's most productive farms and ranches, farmers are destroying unsalvageable wheat crops and selling cows earlier than usual.

Bill Hyman, a cattle rancher in Gonzales County, Texas, about 70 miles south of Austin, said he auctioned off some of his animals earlier this year. With scant grass on the fields, he is feeding supplemental hay to the rest of his herd, but is keeping other expenses down to a minimum.

"We're not buying tractors; we're not buying equipment; we're not buying anything," said Mr. Hyman, who is also executive director of Texas' Independent Cattlemen's Association.

The U.S. Agriculture Department said 66% of wheat fields in Texas and 60% of those in Oklahoma were in poor to very poor condition as of Sunday. The two states accounted for 17% of the nation's production last year.

Much of the nation's winter wheat crop -- which is planted in the fall and harvested in early summer -- is grown on the Southern Plains. Because of the drought there, 36% of the U.S. winter wheat crop is in poor to very poor condition, compared to just 6% this time last year.

In a March report, the U.S. government said it expected farmers to devote 8% more acres to planting all types of wheat than last year. Wheat from other states could compensate for the lower-than-average yields in the south, but heavy rains in some areas, including North Dakota, have delayed the spring planting, said Kim Anderson, a crop marketing specialist with Oklahoma State University.

With wheat prices high, it's also possible that countries in the southern hemisphere such as Australia and Argentina will plant more wheat, he added.

Until recently, this growing season promised to be a profitable one for farmers, as the budding world economy raised demand for food.

For many farmers, it's not just the immediate harvest that is in danger. Terry McAlister, a farmer in Wichita County, Texas, 160 miles northwest of Dallas, said he decided not to spread fertilizer or prepare his fields for such summer crops as cotton and grain sorghum. "We're not going to be able to plant anything until we get rain," he said.

Craig Sanders, a farmer near Boise City in the Oklahoma panhandle, is more optimistic. Although he's expecting his wheat crop to start turning brown any day, he's going ahead with summer planting and hoping for rain.

"I've seen it happening in this country," he said. "It'll turn around and get wet and raise a hell of a crop."

The drought is also likely to further shrink herd sizes, which are already down some 500,000 beef cows from last year, according to USDA data.

"When it comes to enjoying a steak or hamburger, what happens with the drought in Texas eventually affects everybody," said David Anderson, a livestock economist at Texas AgriLife. The state is the biggest producer of beef in the country.

Source: CME News for Tomorrow

Australian Farmers Call For Restrictions on Foreign Investment

Earlier last month, I had posted an article about Brazilian and Argentinian legislators contemplating potential restrictions on foreign investment in the agricultural sector. It's not just South Americans who are concerned about the hot inflow of money into the agricultural sector. Australia, a mining and agricultural powerhouse, is undergoing some of the same pressures.

Australian Farm Federation Questions Foreign Investment
Australia's National Farmers' Federation may seek restrictions on foreign ownership in the agricultural industry, its president Jock Laurie said.

Foreign investment is "certainly being questioned by the Australian community," said Laurie. "The industry in general and the Australian community in general though wants to see some sensible parameters put around who can invest and who can't invest in the industry," he said.

Laurie was testifying to the Senate Economics Committee, which is conducting an inquiry into the Foreign Acquisitions Amendment (Agricultural Land) Bill. The inquiry was established to review legislation proposed by independent senator Nick Xenophon and Greens senator Christine Milne to establish a national interest test on proposed foreign acquisitions of farm land. At present, the treasurer only has to assess purchases by foreigners of farm land valued at 231 million Australian dollars (US$241 million) or more.

Recent international investment into the Australian agricultural industry include, Singapore-based Wilmar International Ltd.'s A$1.84 billion purchase of CSR Ltd.'s Sucrogen sugar and renewable energy unit, which produces 40% of Australia's sugar output. U.S. agri-business giant Cargill Inc. is waiting for final regulatory approval for its purchase of the commodity management arm of AWB Ltd., the country's biggest wheat exporter, from Canada's Agrium Inc.

Rice farmers are considering a A$600 million offer for their processing and food company RiceGrowers Ltd., which trades as SunRice, from Spain's Ebro Foods SA.

Xenophon previously told the Senate that purchases of farm land had accelerated since the global food demand crunch in 2008, naming China, South Korea, Japan, India, Saudi Arabia and the Gulf states as buyers who have been most aggressive in their purchases. Laurie agreed that the rise in food prices in recent years had generated interest in Australian farm land.

"We need to make sure we maintain competition in the market," he said.

Source: CME News for Tomorrow