Brazil rains risk to both corn sowing and soybeans

by Agrimoney.com

It isn't just Brazil's record soybean harvest which is threatened by heavy rains, but follow-on corn too, for which sowings are running at half the pace of last year, a leading analyst said.

Brazil's soybean harvest has been delayed such that in Mato Grosso, which produces nearly 30% of the national crop, only 28% had been harvested as of the end of last month, compared with more than half a year before.

"In February, it usually rains. But some places are getting twice normal levels," Michael Cordonnier, at Soybean and Corn Advisor, told Agrimoney.com.

"Farmers are reporting that they can harvest only a few hours per day and when they can harvest, they are being forced to harvest soybeans at a very high moisture content, some as high as 30% moisture."

In some areas growers were reporting "shrivelled and mouldy soybeans, and in some extreme cases, losses as high as 30%."

Corn impact 

The rains have taken the shine off Brazilian hopes for soybean production in 2010-11, which Dr Cordonnier pegged at 70.5m tonnes – still an all-time high, but below many other forecasts.

And they have raised questions too over corn, which many farmers plant directly behind soybeans for a second, or so-called "safrinha", crop – responsible for some 40% of Brazil's total production of the grain.

The window for sowings has already closed in Mato Grosso with less than half sowings completed, and a further week or so before farmers are likely to give up.

"It might be 60% or more like 55%, by now, but it should be 95%," Dr Cordonnier said, adding that heavy rains were slowing progress in Parana too, although this state has a later planting window.

"This matters in that some 40% of Brazilian corn is grown as a double crop, and 40% of that is growth in Mato Grosso and 40% in Parana."

Indeed, the setbacks could feed through into higher prices. "With a tight balance sheet, he world cannot afford any disappointment in any crop - corn soybeans, wheat – anywhere," he said.

'Losing his mind' 

His comments were backed by consultant Kory Melby who said that a 28,000-hectare farm visited in Mato Grosso had completed 30% of the harvest, compared with 70% a year ago.

"Too much rain - the [manager] was losing his mind yesterday. They are already 9,000 hectares behind and can't go."

The farm was intending to plant safrinha corn until March 5, Mr Melby said, adding that "others will plant later, but usually burns up".

Research from the Foundation do Rio Verde had found that corn planted after February 25  lost 4 bushels an acre in yield per day.

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Global Food Prices Hit New All Time High After 8 Consecutive Months Of Gains

by Agustino Fontevecchia

A new record was set by the UN’s Food and Agriculture Organization’s (FAO) food index in February, which has increased consecutively for the last 8 months to its highest value since the index 1990, when the FAO started monitoring prices.  The food index hit 236 points, gaining 2.2% from January and 34% from February a year ago.

Gains were recorded for all commodity groups but one of those followed by the index, which include cereals, dairy, oil/fats, and meat on the gaining side and only sugar on the declining side.

“Unexpected oil price spikes could further exacerbate an already precarious situation in food markets,” said David Hallam, Director of FAO’s Trade and Market Division.  “This adds even more uncertainty concerning the price outlook just as plantings for crops in some of the major growing regions are about to start,” he added. (Read On The Verge Of A Global Food Crisis).

The cereal index, which hit its highest level since 2008, was the focus of the report, as the FAO estimated that a tightening market on the back of a weak year for cereal production in 2010 will put additional pressure on prices.  “International cereal prices have increased sharply with export prices of major grains up at least 70 percent from February last year,” read the release.

Commodities have been on a tear for some time now, with Bloomberg reporting that the assets group has been “in [its] longest winning streak since ’04” beating stocks, bonds, and the dollar.  Along with surging oil prices, fueled by the crisis in North Africa and the Middle East (MENA), commodities have been fueling inflation around the emerging world, leading to overheating and social and political instability.  As emerging markets from Brazil to China have begun tightening, the whole MENA region has been engulfed in violent political unrest that has threatened to create a vicious cycle of inflation fueled by higher prices fueling social unrest which in turn fuels higher prices.

The situation has prompted experts to warn of a global food crisis reminiscent of the spike in food costs that in 2008 caused various riots.  Fears that higher oil prices and further social unrest could derail the global economic recovery have been augmented by the prospects of tightening in developed economies, as central bankers from Jean-Claude Trichet to Ben Bernanke have expressed fears that inflation could be a more serious threat than had been expected.  (Read Heather Struck’s take on the ECB, Trichet Cites Inflation Fears, Adding Strength To Euro).

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Bernanke’s QE3 Question

by Steve Schaefer

The Federal Reserve is set to cease its buying of U.S. Treasury bonds June 30, but even with more than three months of QE2 remaining many market watchers are turning their focus to what comes next. And if another round of stimulus isn’t on the way, it could mean the lights will dim on the party for U.S. stocks.

David Rosenberg, the former Merrill Lynch economist now at Gluskin Sheff, argues that investors already have a playbook for what happens if Chairman Ben Bernanke and the Fed hit the brakes on stimulus when QE2 hits its expiration date in a few months. (See “Fed Hawks Flap Wings At FOMC.”)

In his note Thursday, Rosenberg writes:

Last year, from April 23rd through to August 27th, the Fed allowed its balance sheet to shrink from $1.207 trillion to $1.057 trillion for a 12% contraction as QE1 drew to a close. Go back a year to the Federal Open Market Committee minutes and you will see a Federal Reserve consumed with forecasts of sustainable growth and exit strategy plans. A sizeable equity correction coupled with double-dip fears were nowhere to be found.
Now over that interval …
• S&P 500 sagged from 1,217 to 1,064.
• S&P 600 small caps fell from 394 to 330.
• The best performing equity sectors were telecom services, utilities, consumer staples, and health care. In other words — the defensives. The worst performers were financials, tech, energy, and consumer discretionary.
• Baa spreads widened +56bps from 237bps to 296bps
• CRB futures dropped from 279 to 267.
• Oil went from $84.30 a barrel to $75.20.
• The VIX index jumped from 16.6 to 24.5.
• The trade-weighted dollar index (major currencies) firmed to 76.5 from 75.5.
• Gold was the commodity that bucked the trend as it acted as a refuge at a time of intensifying economic and financial uncertainty — to $1,235 an ounce from $1,140 and even with a more stable-to-strong U.S. dollar too.
• The yield on the 10-year U.S. Treasury note plunged to 2.66% from 3.84%.

Who, Rosenberg asks, will buy bonds when the Fed puts its wallet away? The very same investors who poured into the bond market in the April-August period last year, “the ones who were switching out of equities, commodities and other risk-assets.” That could pressure a U.S. equity market that has seen a mostly unchallenged run higher since Bernanke put QE2 firmly on the table in August.

PIMCO bond guru Bill Gross offered a similar, albeit slightly different, sentiment in his March Investment Outlook. Though he acknowledges that “Someone will buy [Treasuries], and we at PIMCO may even be among them,” Gross also says that the handoff from public to private credit creation has yet to happen. He argues that Treasury yields are currently too low for PIMCO to be a buyer, by as much as 150 basis points, but acknowledges the other side of the argument:

As a counter, one would argue (and I would partially agree) that the U.S. and indeed developed global economies must keep yields artificially low for some time if post Lehman healing is to take place. But that of course is the point. By eliminating QE II, the Fed would be ripping a Band-Aid off a partially healed scab. Ouch! 25 basis point policy rates for an “extended period of time” may not be enough to entice arbitrage Treasury buyers, nor bond fund asset allocators to reenter a Treasury market at today’s artificially low yields. Yields may have to go higher, maybe even much higher to attract buying interest.

Both Gross and Rosenberg indicate that the end of QE2, without QE3 following in its wake, will be a rocky time for investors. Gross goes so far as to compare it to D-Day, “fraught with hope for victory, but fueled with immediate uncertainty and fear.”

He writes:

Bond yields and stock prices are resting on an artificial foundation of QE II credit that may or may not lead to a successful private market handoff and stability in currency and financial markets.

At some stage, the Federal Reserve is going to take the training wheels off the market and the likely result is a few scrapes and bruises. And as Rosenberg points out in closing, a note of caution is creeping into markets. Consensus forecasts for first-quarter earnings growth in the S&P 500 have come down slightly after increasing steadily since October, and nearly one-third of the U.S.

IPOs that came to market since June 2010 are trading below their offering price according to data from Renaissance Capital. (That group does not include General Motors, but just barely as the automaker trades at $33.08 Thursday after pricing its November IPO at $33.)

Stocks have been resilient through the recent jump in oil prices, and rallied on the back of fewer weekly jobless claims Thursday morning, but the Fed’s presence is a market factor that cannot be overlooked or overstated. If the central bank withdraws some of its liquidity at the end of June, the back half of 2011 could be turbulent.

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HOW HIGH WILL GASOLINE PRICES GO?

by Cullen Roche

While the equity markets have taken some recent relief in last month’s economic data gasoline prices have continued to surge.  The most recent national gas price is $3.44.  This is up 10% from just 3 weeks ago when prices were $3.10. Prices are still 20% from their 2008 highs, however, the seasonal trends look very similar.  If one looks back at recent trends the seasonality is quite clear – gas prices always surge in the first half of the year.  Since 2005 gasoline prices have surged an average of 41% during the first two quarters of the year.

If prices were to surge even 30% from their January low prices would hit $3.80 by the middle of the summer.  If prices were to match their 2008 increase Americans will be staring at $4 gasoline and an equivalent of wiping out the entirety of the stimulative effects of the Obama tax cut.  I don’t think these are unreasonable estimates given the fact that the prior year rallies have lacked the two powerful exogenous forces that are currently driving prices – the conflict in the Middle East and the speculative aspects associated with QE2.  In fact, it would not be at all unreasonable to estimate that these prices are on the low end of potential price increases.   I think analysts are substantially underestimating the potential for higher gasoline prices and the impact on consumer spending.  This likely isn’t enough to derail the recovery, but it’s one risk markets are eager to overlook.

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WHY LESS JOBS ARE GOOD….FOR WALL STREET

by Cullen Roche

As Ray Dalio mentioned yesterday, we’re in the sweetspot of the cycle.  And boy is it sweet for corporate America.  They’re sitting on near record margins, high double digit revenue growth and a bottom line that has swelled to record levels.  There’s a dilemma building, however, for the markets.  While corporate America recovers and begins to pick-up hiring Wall Street has another problems on its hands – the Fed.  The Fed’s easy money policies and explicit backstops have been a boon to banks and traders all over the world.  Shorts have been squeezed out of the market and those who levered up on equities have been handsomely rewarded by the Bernanke Put.

As the labor markets recovers the Fed will be pressured to end its easy policy approach.  It’s clear that QE2 was never really necessary to begin with.  The fiscal policy of the last 2 years, specifically, a massive 10% budget deficit is injecting the private sector with the cash that is needed to offset the effects of de-leveraging.  Monetary policy has helped, but to a far lesser degree.  And QE2 has actually shown substantial signs of detracting from the recovery.  But Wall Street has loved it and rightfully so – never has there ever been such explicit commentary from the Fed that encourages speculators to go out and bid up risky assets.

But while more jobs might be great for Main Street they’re bad for Wall Street.  Not only will investors begin to worry about corporate margins and being closer to the end of the equity cycle than the beginning, but the pressure will mount for the Fed to finally raise rates and most certainly end QE2.  This doesn’t mean the bull market will be over, but a few large NFP reports will likely put pressure on the markets as they begin to discount the potential for a tighter Fed.  For Wall Street, less is better.  A big miss in Friday’s NFP report is not a bad thing.  And a level not too hot and not too cold (150K or so) is just right….This ensures an easy Fed, continued profits, and likely higher stock prices.  Of course, for Main Street it stinks, but this recovery was never really centered around helping Main Street anyhow….Why start now?

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COMMODITIES AND THE CHINESE GROWTH MACHINE

By Rohan Clarke, Data Diary

Another month rolls by (Feb report here) and commodities still power on – the RBA published it’s monthly commodity index (here):

The prices of Australia’s basket of commodity exports climbed higher against all comers.

Preliminary estimates for February indicate that the index rose by 2.2 per cent (on a monthly average basis) in SDR terms, after rising by 5.3 per cent in January (revised). The largest contributors to the rise in February were increases in the estimated prices of iron ore and coal, reflecting some further adjustment towards the higher contract prices in the March quarter. Increases in the prices of crude oil and wheat also contributed to the rise, while beef & veal prices fell. In Australian dollar terms, the index rose by 1.9 per cent in February.

And we can expect more of the same according to ABARE – their forecasts for Australia’s top 10 exports for this year and next (here):

That is a pretty buoyant outlook for our commodities exporters, however you paint it – all those Chinese farmers moving into brand new apartments have to get a fridge, dishwasher and playstation from somewhere.

So how much are equity prices reflecting these types of expectations? Well, running through valuations for some of Australia’s major miners, it looks like both volume and price assumptions of this ilk are baked into prices. Consider BHP ostensibly trading at ~10.5 times 2011 forecast earnings and 9.0 times 2012. Looks reasonable – on the assumption that China demand growth continues apace – and therefore commodity prices at least hold around today’s levels.

We can see the tight correlation between spot commodity prices and those of the commodity producers in the following chart that maps the RBA’s US$ base metal price index against the Australian materials index (XMJ). We’ve included the non-rural index to highlight the point – resource equities are a risk market that take their lead from the more visible and tradeable metals markets:

It is because resource equities have kept pace with spot price appreciation that the risk/reward is skewed against owning them.  For equities to move higher from here, commodity prices need to climb further – something that is becoming progressively harder and harder to sustain.

Which gets me to the thought that has been nagging away – will higher commodity prices create their own demand destruction? It’s an extension of Morgan Stanley’s point on oil prices (via Pragmatic Capitalism here). Not only are higher energy prices likely to undermine the economics of many a zinc, aluminum and copper refiner, the higher raw material prices are doubling up the total cost for the end user. Perhaps this is why Chinese equities have been underperforming commodity equities for some time now?

For a reality check on how Chinese demand might evolve in a tighter credit environment read this article from AsiaOne news “Chinese steel prices slip again as demand falters” (here). The following quote would have Minsky rolling his eyes in despair:

“The interest rate hike hasn’t been so awful for traders as long as the commodity prices are high, but the really painful thing is the credit crunch – steel traders cannot borrow money,”.

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