Russia's return to wheat exports hits EU, US hopes

by Agrimoney.com

Wheat exports from the Soviet Union will double next season – assuming no return of its devastating drought – at the expense of European Union and US shipments.

The US Department of Agriculture, in its first forecast for world wheat production and trade in 2011-12, estimated exports from producers such as Kazakhstan, Russia and Ukraine rebounding to 26.3m tonnes, from a drought-depressed 13.1m tonnes this season.

The recovery will still leave exports from a bloc renowned for its fierce competitiveness in export markets well below highs reached at the end of the last decade.

Nonetheless, the USDA, in its influential Wasde report, cited "increasing competition" from the former Soviet Union in forecasting an 18% slide, to 28.6m tonnes (1.05bn bushels), in American wheat exports in 2011-12.

And it forecast EU exports tumbling 19% to a four-year low of 18.0m tonnes.

Rain needed

However, the decline in European shipments will be reflected only in part in rising stocks, with the region's own livestock industry swallowing an increasing proportion of a crop which, at 136.6m tonnes, was pegged below some other estimates.

Strategie Grains has estimated the crop at 143.6m tonnes, with the USDA's European attaches coming up with a 141.25m-tonne number.

"Dryness prevailed in northern Europe during March and April and continues into May, with far below-normal precipitation levels and much-above-average temperatures," the department said.

"Dryness is reportedly interfering with fertilizer uptake by crops. Both wheat and rapeseed crops need rainfall soon to prevent sharp yield reductions in northern France, northern Germany, England, and western Poland."

Low winterkill

In Russia, meanwhile, although autumn sowings had proved disappointing, "winterkill is likely to be considerably lower than last year which will mitigate the impact of the sharp reduction in planted area", the USDA said.

"Winter crops have resumed vegetative growth throughout European Russia, and satellite-derived vegetative indices indicate that conditions are generally above average in the south and below average farther north."

The Wasde also highlighted static world demand for wheat imports, thanks largely to lower needs in North Africa, where many countries are expecting better crops this year.

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Can Corn prices Rebound Again?

By Phyllis Picklesimer

Corn prices may have difficulty rebounding from the current decline if the USDA increases the projection of year-ending stocks, said University of Illinois agricultural economist Darrel Good.

"The corn market has been the poster child for the sharp increase in agricultural commodity prices that began last summer and extended into the spring of 2011. Higher corn prices were driven by a combination of shortfalls in crop production, including the U.S. corn crop and strong demand," he said.

Strong demand for U.S. corn has resulted from sharply higher energy and livestock prices, a large decline in foreign wheat production, a small decline in foreign coarse grain production, and a continuation of the weak U.S. currency. But strong demand does not necessarily imply an increase in corn consumption, he said.

"Instead, a strong demand scenario implies that end users are willing to use more corn than before at the same price or are willing to pay a higher price for the same level of consumption," he noted.

Year-over-year consumption is expected to increase in the ethanol and by-product category. Feed and residual use and exports have been projected near the level of a year earlier. Steady to higher consumption at much higher prices reveals the demand strength, he said.

"The pattern of higher corn prices since June 30, 2010, included short periods of substantial price declines. July 2011 corn futures declined about 50 cents in the last week of September 2010, 90 cents in mid-November 2010, and $1.30 in the first half of March 2011. Each period of decline was followed by new highs, with July futures reaching a peak of about $7.89 on April 11. The low price reached on May 6 was $1.09 below that peak," he said.

The most recent price decline reflected a combination of factors influencing most agricultural markets and factors specific to the corn market. General factors included renewed concerns about economic recovery, some recovery in the value of the U.S. dollar, and lower crude oil prices, he said.

"For the corn market specifically, commentary reflected expectations that the USDA would lower the projection of corn consumption and increase the projection of year-ending stocks in the May 11 report of world supply and demand estimates. There is not a strong case for adjustments in the projection of feed and residual use of corn," Good said.

That projection was lowered in April, but no new consumption data will be available until the June 1 Grain Stocks report is released on June 30, he said.

Larger feed lot inventories of cattle and declining corn prices relative to wheat prices do not point to declining feed use of corn. Weekly estimates of ethanol production continue to be marginally larger than production needed for corn use to reach the USDA projection of 5 billion bushels for the year. High prices of gasoline relative to ethanol prices continue to favor ethanol blending. Ethanol consumption, however, could be threatened if high gasoline prices result in a further decline in fuel consumption, he said.

"A case can be made for a smaller projection for corn exports during the current marketing year. Weekly export inspections continue to be below the rate needed to reach shipments of 1.95 billion bushels. New sales in the last two weeks of April also dropped below the rate needed to sell 1.95 billion bushels of U.S. corn this year," Good said.

Increased feeding of wheat in some parts of the world and the strong price incentive to purchase new-crop rather than old-crop U.S. corn may result in shipments falling short of 1.95 billion bushels. With new-crop availability still four to five months away, it is not clear how much import business can be delayed, he noted.

The Weather Wild Card

"The wild card in the corn market is the development of the 2011 crop," Good said. "The slow start to planting has raised issues about both the yield potential for the 2011 crop and the magnitude of planted acreage."

The U.S. average corn yield can still be high with more than the normal amount of the acreage planted after the optimum date, but yield would be expected to be lower than if most of the crop had been planted in a timely fashion, he said.

"The weakening La Nina weather system provides some hope that the Corn Belt will not experience stressful summer weather and that the U.S. average corn yield can still approach a trend level," he said.

Reports suggest that planting made good progress last week in northern Illinois, Iowa, and Nebraska, but planting delays look to be more severe in the rest of the country. Corn acreage may exceed intentions in areas now being planted rapidly but could fall short of intentions in the extremely wet areas.

"Unlike the previous price declines over the past nine months, corn prices may have more difficulty rebounding from the current decline if the USDA increases the projection of year-ending stocks. Prices will likely now depend more on planting progress and crop development," he said.

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Barclays Capital Survey Says China and Commodities Still Favorable (Guest Post)

By Commodities Now

Barclays Capital held their 4th annual China Commodities Seminar in Suzhou last week of April, 2011. The seminar was attended by around 50 representatives from major producers, consumers and trading houses, primarily in the energy and metals sectors. During the event, BarCap surveyed participants on their outlook for a number of areas. The key findings are below.

• Most are relatively positive on China, with 86% expecting 2011 GDP growth to come in above 8% and 32% expecting growth of over 9%.

• While monetary tightening has been ongoing for some time, the current macro environment is not generally seen as restrictive.

• A majority cited price volatility and rising costs as their key challenges, with only a few concerned about weak demand and difficulties in getting finance.

• Energy and agriculture are the two markets expected to benefit most from China’s 12th five-year plan, industrial metals less so.

• The world often sees China as the predominant driver of commodity prices, but our Chinese audience viewed the US as having the bigger influence. Dollar weakness was cited as the biggest upside risk for commodities in 2011 while a premature removal of Fed stimulus was seen as the biggest downside risk.

• Crude oil and gold are by far the favourite picks for the top commodity performers in 2011. Iron ore is seen as the likely worst performer, while sentiment towards base metals is relatively weak.

China: Still Favourable Environment

“Our survey shows that despite concerns about credit tightening and a potential hard landing for China, many people remain relatively positive on China’s outlook for this year. Indeed, 86% of the seminar participants are expecting 2011 GDP growth to come in above 8% while 32% are expecting growth of over 9%,” according to BarCap.

“When asked about current monetary and liquidity conditions, the results suggest that the current macro environment is not generally seen as restrictive. 72% of the participants thought that monetary conditions are tighter than last year, but that further tightening was needed. Only 15% said monetary conditions are extremely tight and having a noticeable impact on their businesses, while 13% still consider monetary conditions as ‘loose’.”

“Price volatility and rising costs were cited as the biggest challenges that Chinese companies face. Interestingly, only a small proportion cited weak order books (9%) and difficulties in obtaining financing (9%) as their biggest challenges. This is in stark contrast to the results of a similar survey we conducted in late 2008 when over 70% cited weak order levels as the key challenge for their businesses (see Survey Snapshot – results from the CDB-Barclays Capital Commodities Seminar in China, 8 December 2008).”

“Looking forward, most participants expect energy (43%) and agriculture (39%) to benefit the most from the 12th five-year plan. Just 11% expect the base metals sector to be the biggest beneficiary. Given that a good proportion of our audience is involved in the base metals sector, this result indicates relatively cautious sentiment in the Chinese base metals market.”

“Overall, the results are reassuring about China’s growth and point to an environment of robust demand, still accommodative credit conditions and rising costs.”

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Cycles Analysis Says that the Stock Market Bears are About to Roar

By: readtheticker

The Stock market pushes higher and higher, what fool would take a short position against this mighty liquidity pump up, however there are a few dark clouds in the next few months: US Summer is seasonly poor, QE2 ending, earnings are peaking, Greek woes. When the SP500 sinks, historically the US dollar rallies, transports fall and funds rotate out of aggressive stocks to defensive stocks. Let's review these cycles to see what we can expected next.

Dow Transports: If Transports fall, this can lead to a Dow Theory Sell signal.

Defensive Stocks: If folks are bearish, they begin to rotate monies into defensive stocks.

US Dollar: If the risk off trade is the theme, then the commodity currencies and the Euro will fall, the offset will be a rally in the US Dollar. A rising US dollar will wipe millions off the sales revenue of SP500 companies, thus earnings will be lower.

Between 2009/10, many cycles suffered an inversion to price, this was due to very bearish sentiment reversing on massive quantitative easing (QE1) from central banks around the world.

The cycles show all are due for a rollover, it is going to be very interesting in the next three months. No wonder sector rotation into defensive stocks is the current theme in the SP500. 

QUESTION: Are the bears about to roar ?

If you concur, SPY puts and bearish ETFs should be on your menu near the end of May 2011.

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Inflation Fears: Real or Hysteria?

By: Ellen_Brown

Debate continues to rage between the inflationists who say the money supply is increasing, dangerously devaluing the currency, and the deflationists who say we need more money in the economy to stimulate productivity. The debate is not just an academic one, since the Fed’s monetary policy turns on it and so does Congressional budget policy.

Inflation fears have been fueled ever 2009, when the Fed began its policy of “quantitative easing” (effectively “money printing”). The inflationists point to commodity prices that have shot up. The deflationists, in turn, point to the housing market, which has collapsed and taken prices down with it. Prices of consumer products other than food and fuel are also down. Wages have remained stagnant, so higher food and gas prices mean people have less money to spend on consumer goods. The bubble in commodities, say the deflationists, has been triggered by the fear of inflation. Commodities are considered a safe haven, attracting a flood of “hot money” -- investment money racing from one hot investment to another. 

To resolve this debate, we need the actual money supply figures. Unfortunately, the Fed quit reporting M3, the largest measure of the money supply, in 2006. 

Fortunately, figures are still available for the individual components of M3. Here is a graph that is worth a thousand words. It comes from ShadowStats.com (Shadow Government Statistics or SGS) and is reconstructed from the available data on those components. The red line is the M3 money supply reported by the Fed until 2006. The blue line is M3 after 2006.

The chart shows that the overall U.S. money supply is shrinking, despite the Fed’s determination to inflate it with quantitative easing. Like Japan, which has been doing quantitative easing for a decade, the U.S. is still fighting deflation. 

The part of M3 that collapsed in 2008 was the “shadow banking system,” including money market funds and repos. This is the non-bank system where large institutional investors that have substantially more to deposit than $250,000 (the FDIC insurance limit) park their money overnight. Economist Gary Gorton explains:

[T]he financial crisis . . . [was] due to a banking panic in which institutional investors and firms refused to renew sale and repurchase agreements (repo) – short‐term, collateralized, agreements that the Fed rightly used to count as money. Collateral for repo was, to a large extent, securitized bonds. Firms were forced to sell assets as a result of the banking panic, reducing bond prices and creating losses. There is nothing mysterious or irrational about the panic. There were genuine fears about the locations of subprime risk concentrations among counterparties. This banking system (the “shadow” or “parallel” banking system) ‐‐ repo based on securitization ‐‐ is a genuine banking system, as large as the traditional, regulated banking system. It is of critical importance to the economy because it is the funding basis for the traditional banking system. Without it, traditional banks will not lend, and credit, which is essential for job creation, will not be created. [Emphasis added.]

Before the banking crisis, the shadow banking system composed about half the money supply; and it still hasn’t been restored. Without the shadow banking system to fund bank loans, banks will not lend; and without credit, there is insufficient money to fund businesses, buy products, or pay salaries or taxes. Neither raising taxes nor slashing services will fix the problem. It needs to be addressed at its source, which means getting more credit (or debt) flowing in the local economy. 

When private debt falls off, public debt must increase to fill the void. Public debt is not the same as household debt, which debtors must pay off or face bankruptcy. The U.S. federal debt has not been paid off since 1835. Indeed, it has grown continuously since then -- and the economy has grown and flourished along with it. 

As explained in an earlier article, the public debt is the people’s money. The government pays for goods and services by writing a check on the national bank account. Whether this payment is called a “bond” or a “dollar,” it is simply a debit against the credit of the nation. As Thomas Edison said in the 1920s:

If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good, makes the bill good, also. The difference between the bond and the bill is the bond lets money brokers collect twice the amount of the bond and an additional 20%, whereas the currency pays nobody but those who contribute directly in some useful way. . . . It is absurd to say our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay, but one promise fattens the usurers and the other helps the people. 

That is true, but Congress no longer seems to have the option of issuing dollars, a privilege it has delegated to the Federal Reserve. Congress can, however, issue debt, which as Edison says amounts to the same thing. A bond can be cashed in quickly at face value. A bond is money, just as a dollar is. 

An accumulating public debt owed to the IMF or to foreign banks is to be avoided, but compounding interest charges can be eliminated by financing state and federal deficits through state- and federally-owned banks. Since the government would own the bank, the debt would effectively be interest-free. More important, it would be free of the demands of private creditors, including austerity measures and privatization of public assets. 

Far from inflation being the problem, the money supply has shrunk and we are in a deflationary bind. The money supply needs to be pumped back up to generate jobs and productivity; and in the system we have today, that is done by issuing bonds, or debt.

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THE PERPETUAL WALL OF WORRY

by Cullen Roche

Here’s a nice chart from Fidelity Investments showing the perpetual struggles that the global economy and the equity markets have endured over the last 40 years. It shows that economies will enter substantial periods of hardship, however, if the citizenry are moving in the right direction, they are likely to continue making progress. After all, when taken to an extreme that is the story of man. We innovate, overcome, survive.

Many readers might think of me as a pessimist because I tend to focus on the negatives. As I’ve described before, butterflies and rainbows don’t ruin your day. It would be easy to focus on the positives during the climb to the top of the investment mountain. But it’s not the butterflies and rainbows that get in your way. It’s the loose rocks. And if you’re not keeping an eye out for them they’ll ruin more than your day. In managing your downside risks you actually increase the odds of greater upside.

And while this isn’t an advertisement for “buy and hold” or similar approaches it is an advertisement for common sense and good risk management. Common sense says that mankind will always wake up in the morning attempting to be better than he/she was yesterday. Fighting this powerful trend through persistent pessimism might pay-off in the short-term, but it is guaranteed to lose in the long-term. And a good risk manager knows there will be bumps along the way. Plan accordingly.

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