The Golden Bottom

by Sean Brodrick

I’ve told you before that gold is showing relative strength to other commodities, and I expect it will lead the next rally. Are we seeing gold bottom right now? And if so, how should you play it?

Let me show you two charts. First, a weekly chart of gold, as tracked by the SPDR Gold 

Trust (GLD):

Looking at the chart, you can see that the GLD hasn’t broken its uptrend — in fact, it is still stepping higher along its 20-week moving average.

An interesting factoid is that the GLD spends an average of 19 to 20 weeks above its 20-week moving average before touching it again. It’s only been above it for 13 weeks this time.

Now, a more cautious investor would wait for the GLD to touch support before buying it again. And you can certainly wait. But if you can stomach risk, there’s nothing wrong with buying it now. By the time the GLD touches its 20-week moving average, that average might be much higher.

And a clue that gold may be about to head higher comes in what’s happening in gold mining shares. Take a look at this chart of the Gold Bugs Index — a basket of leading gold miners — divided by the GLD:

The green line on this chart is the GLD, the black line is the Gold Bugs index divided by the GLD. 

For the past few months, this miner/metal ratio has nose-dived. But now it’s turning higher. When that has happened in the past, it has signaled that both miners and metals are about to head higher.

The reason is simple: Miners are leveraged to the underlying metal. Investors start snapping up gold miners, or the best ones anyway, when they start to think that gold itself is going higher.

So, this is an indicator of more bullishness spreading through gold and gold mining.

Charts are nice, but many of us need fundamentals before we put money to work.

So, here’s a quick run-down of just five of the forces I’m watching:

5 Forces Lining Up for Higher Gold Prices

1. Gold coin sales are soaring. Bloomberg recently reported that in the month of May, sales of gold coins are on track for their best month in a year. The last time sales reached that level, the price of gold rose 21% in the next year. 
2. The United States hit its debt ceiling of $14.3 trillion on Monday. The budget deficit this year alone is set to be a record breaking $1.5 trillion. Difficulty in hammering out a budget agreement erodes the faith of the foreign banks we need to buy U.S. Treasuries. Bookkeeping maneuvers will allow the Treasury to continue auctioning debt for another 11 weeks. Still, our country’s appalling fiscal state is one reason why gold and silver remain important investments for any portfolio.
3. Threat of Greek debt default. One of the main guys who was working on a solution to the Greek debt crisis — Dominique Strauss-Kahn, the director of the International Monetary Fund — is now cooling his heels in a cell on Rikers Island, facing rape charges. With the IMF in disarray, the already boiling Greek crisis could explode. Portugal is next. These crises affect the stability of the euro, and the last time Europeans got scared about that, they rushed into gold.
4. Central Banks are buying gold hand over fist. Mexico’s Central Bank just spent $4.6 billion buying 93.3 metric tonnes of gold. Russia bought 18.8 metric tonnes of the yellow metal, Thailand’s Central Bank bought 9.3 metric tonnes, and Belarus bought another 2.5 metric tonnes. Central Banks seem to be picking up the pace of their gold buying. That’s probably bullish for prices.
5. Gold ore grades are falling fast. A new U.N. report on resource depletion shows how ore grades at gold mines have fallen off over the past century:

One hundred years ago you could find around 20 grams of gold per metric tonne of ore at mines in Australia, Brazil, Canada and South Africa. Now, there are mines going into production with less than a gram per tonne of gold, and they’re quite profitable!

It’s not for lack of looking that ore grades are going down. In fact, the latest data from Metals Economics Group shows that spending by gold explorers rose by $1.9 billion to $5.4 billion last year.

It’s simple math: Lower grades and higher mining costs should mean higher gold prices. 

How to Invest

I think select gold miners have already bottomed and should head higher from here. One I like is Goldcorp (GG). Its latest earnings report was excellent:

• Gold sales for the first quarter totaled 627,300 ounces on production of 637,600 ounces.
• Revenues increased to $1.2 billion dollars, a jump of more than 69% from the year-earlier period.
• At the same time, earnings per share more than doubled to $0.82 from $0.32.
• Operating cash flow increased 180% to $586 million from $282 million a year ago.

You can also buy physical gold or one of the funds that holds physical gold. What exactly you should buy depends on your own investing needs and your appetite for risk.

Right now, I’d say gold’s risk is to the upside. Sure, we could see more consolidation here, especially if the U.S. dollar continues to rally in the short term. But the longer-term trends are much higher for gold and gold miners.

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Historical Echoes: Communication before the Blog…

New York Fed Research Library

Over the years, the Federal Reserve System has used many methods to communicate about the role it plays in support of stable prices, full employment, and financial stability. Current communication tools include the new press conferences by the Chairman, speeches by Bank presidents, public websites, economic education programs, local outreach efforts, publications, and blogs like this one.

Ninety years ago, however, the options were more limited. The Fed was still new and the nation’s economy was plagued by a growing number of bank failures. The five posters below (from the mid-1920s), with their images of strength and stability, were part of a larger series designed for display at member banks. They were likely intended to inform the public about the Federal Reserve System and foster confidence in its member banks.

Thanks to the San Francisco Fed archive for making the posters available.

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Corn Could Be Headed to $8/bu. or Higher

By: Fran Howard

Severe flooding along the lower Mississippi River, a major thoroughfare for barges, and persistent planting delays in several top corn-producing states, have sent corn prices soaring. Already the relentless rain and cooler-than-normal temperatures in many of the top corn-producing states have convinced some analysts to reduce corn acreage estimates.

“We’re looking at 2.5 million to 3 million less acres planted around the Corn Belt compared with the Prospective Plantings report estimate,” says Peter Georgantones, Abbott Futures, Minneapolis. USDA’s Prospective Plantings report put corn acreage at 92.2 million, an increase of 4 million acres from 2010. Acres will be lost in Ohio, the Dakotas, Minnesota, Wisconsin, and along the lower Mississippi, he says.

“We’ll probably find acres in Iowa and Nebraska, but the carryout will be reduced to 600 to 650 million bushels from USDA’s estimated 900 million bushels,” Georgantones says. “That will put us in a very tight situation, similar to the past year.”

Georgantones thinks $8/bu. corn is almost a given. “It could be higher,” he says. Weather issues in Europe have delayed wheat planting there and severe drought in the southern Great Plains has created a dire situation for wheat, and wheat prices should provide additional support to corn. “Corn is on very solid footing right now,” Georgantones adds.

Adam Stout, risk management consultant for INTL/FCStone, Kansas City, says, “Most in the trade are anticipating anywhere between a 1.5-million to- 2-million acre decline from the Prospective Plantings report.” He argues that a lot of the anticipated reduction in acres is already priced into the market.

“July corn (May 18) is already 90 cents off its lows of May 12,” Stout notes.

“There’s been a shift in the discussion. The trade has gone from talking about planting delays and the impact on yields to planting delays and less acres.”

For new-crop corn to hit $8/bu., Stout says something more substantial than talk would need to move the market, such as hot, dry weather in the Corn Belt this summer or actual reductions in acreage in USDA’s upcoming supply and demand estimates.

As of May 15, corn planting progress in Ohio, a state plagued by surplus rain and soil moisture, was only 7% complete, and North Dakota growers only had 14% of their corn planted. Planting was also well behind the five-average planting pace in Indiana, Kentucky, Michigan, Minnesota, Wisconsin, Pennsylvania, South Dakota, and Tennessee.

 

Grain Shipping Woes

Flooding along the lower Mississippi and its tributaries in the Corn Belt has added to planting concerns and shipping issues. Barge traffic was halted temporarily on a 15-mile stretch of the lower Mississippi near Natchez, Miss., Tuesday. When it resumed, barges were limited to traveling one at a time and instructed to move as slowly as possible thorough the area.

In addition to the temporary suspension of barge traffic, many freight terminals along the lower Mississippi between Baton Rouge and New Orleans shut down May 17 because of high water. On a typical day, as many as 600 barges travel up and down the Mississippi, with each one capable of carrying the equivalent of 17 rail cars of grain.

“Not a lot of grain is moving on the river now,” says Jim Tarmann, field services director for the Illinois Corn Growers Association. If shipping delays or suspensions carry into June when grain shipments typically increase on the river, concern over delayed shipments will grow.

“Whenever the river shuts down anything moving north or south is delayed,” says Tarmann. “Those delays cost producers money as the cost associated with shipping goes up.” If grain shipments move to rail or truck, demand for those transportation services and their associated costs also rise.

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Future Agricultural Production Limited

By: Marc Schober

The world’s gross agricultural output needs to increase by 3.4% to meet the growing demand primarily driven by emerging markets across the globe. The two primary ways to increase agricultural production are to either increase the amount of acres planted or increase productivity with technology.

Crop yields have been slowly increasing over time, with the largest increases due to the green revolution and the advancement of hybrid seed technology. Even with the past seed technology, crop yield increases are near 1.0% per year in the U.S while a considerable amount of farmland is being lost to development. Crop production must increase via either new technology or by expanding the amount of cropped land by bringing idle arable land into production.

Land to be Brought into Production

The ability to expand arable acres over the next 40 years will be difficult. The best areas for farming have already been identified and are being used for production. The incremental arable acres to be put into production will be on the periphery, with marginal growing conditions and transportation issues.

Presently, the growth of arable farmland has been flat as development of farmland in North America and Europe is offset by expansion in Africa and South America

There are roughly 1.5 billion hectares that are currently being farmed in the world. The FAO estimates that the world has a total of 2.5 billion hectares of “very suitable” or “suitable” for cultivation. 80% of the reserve land is located in Africa and South America.

Investment bank Credit Suisse estimates that only about 300,000 hectares of additional potential acreage, with the majority in Brazil and Indonesia. The table below summarizes the current and potential global arable hectares.

The primary expansion opportunity lies in Brazil, where the government organization Conab estimates there is an additional 106 million hectares available for agricultural development. The majority of this land is located in Brazil’s cerrado or high plains, a vast savannah in the central-western area of the country. The cerrado comprises of roughly a quarter of Brazil’s land.

Historically the soil was thought of as unfarmable due to the high acidity levels and lack of nutrients. New technologies that allowed farmers to improve soil fertility and a new type of soybean developed to grow in tropical climates allowed farmers to start producing crops in the early 1980s.

Today, the cerrado is Brazil’s most important soybean producing region and accounts for nearly all its growth in soybean production since 1980. Roughly half of the country’s corn and 90% of its cotton is also produced in the cerrado.

The primary issue expanding acreage in the cerrado is infrastructure as the majority of additional acres are located in Brazil’s cerrado, which is 1,500 kilometers from the nearest ports. Prices will need to rise substantially before the cerrado will be able add to global production.

Indonesia has substantial ability to expand acreage for palm oil cultivation. The Indonesian government estimates that it only using half of its land available for cultivation. In January, 2011, Indonesia targeted expanding the county’s agricultural land by two million hectares in the medium and long-term, although this plan his received much criticism as this would result in the removal of tropical forests.

Ukraine, Russia and Kazakhstan saw a substantial decline is arable hectares and crop yields following the decline in communism. The FAO estimates that arable hectares declined 11% between 2005 and 1992. Credit Suisse estimates that if arable hectares return to 1992 levels, this would add 1.9% to the total global arable acres.

Farmland set aside under the Conservation Reserve Program (CRP), could add to the amount of U.S. arable acres. At the end of 2010, 31.3 million acres were enrolled in the CRP in nearly 738,000 contracts according to the USDA. As the CRP contracts expire, much of this land may be put back into production, but a majority of this land is marginable at best, which is the primary reason it was put into the program in the first place.

Biotechnology Expansion

Although the amount of farmland is limited in the U.S. and in the world, farmland that is able to produce corn is expanding in the Midwest primarily due to biotech seeds. Several large seed and agrichemical companies such as Monsanto, Dupont (Pioneer), Dow Chemical, Syngenta, Bayer Crop Science, among others, have focused years of research and product development on higher performing varieties and hybrids of important food and feed crops.

While Genetically Modified Organisms (GMOs) are not without controversy and are essentially banned in Europe and Japan, in the U.S. better drought and cold tolerance has expanded the land area that can be used for cold sensitive crops. For instance, the land planted to both corn and soybeans over the past 15 years has expanded North (colder) and West (drier). The acreage allotted to corn and soybean production is expanding northwest to regions where growing degree days are in less numbers.

Biotech seed manufactures are currently developing the next generation of biotech traits that focus on greater productivity, improved nutrient use, disease resistance, plant density, and continued drought and cold tolerance.

All farmland that is planted with GMO corn requires a set percentage of the field to be planted with non-GMO corn, called refuge acres. The theory is to prevent pests and disease from becoming immune to the GMO traits that were developed to deter the pests and disease in the first place. Historically refuge acres must make up 20% of planted corn in the Corn Belt, but Monsanto’s Genuity SmartStax (DeKalb Brand) and VT Double Pro Corn seed allows for only 5% of the acreage to be planted as refuge, according to Monsanto.

On average, GMO corn will have higher yields than refuge corn thus any decrease in refuge acres should increase yields and boost the total production. It is the goal of seed manufacturers to continue to decrease the amount of mandatory refuge acres as well as supply refuge seed alongside GMO seed inside the same bag. Refuge in a bag seed corn may become the new staple for the American farmer very soon.

Nitrogen fertilizer is the largest fertilizer expense for corn farmers. Roughly $8 billion is spent on nitrogen by corn farmers each year in order to obtain maximum yields. Seed manufacturers Monsanto and DuPont are working on developing seed traits that are much more efficient with nitrogen use. The theory of efficient nitrogen use among corn would substantially cut down on the need for nitrogen and also maximize corn yields with less input costs.

Precision Farming

Precision farming is drastically changing the efficiency of the entire farming operation through new technology in machinery. Through information technologies, farmers are able to use variable fertilizer and nutrient applications, variable-rate seed populations, minimal tillage methods, and the time saving auto steer capabilities in new tractors.

Real Time Kinematic (RTK) Global Positioning Systems (GPS) are being used in many farm operations across the world. When paired with information technology, RTK GPS allows farmers to save on fertilizer costs, and most importantly, time. Farmers can take on information such as Cat Ion Exchange (CEC) levels from the soil and apply variable amount of fertilizer to accommodate the soil.

Precision farming has made way for strip tillage methods. Strip tilling is when a farmer using RTK GPS and computers tracks their progress within an inch of accuracy. Each year the rows of corn are shifted to the left or right by a few inches to make use of a new area of soil. This new designated strip will then receive the fertilizer and house the feed furrows for the next crop. Auto steer technology must be used with strip tilling for farmers to stay on the narrow strips each year. RTK GPS auto steers the tractor while tilling, fertilizing, planting, and harvesting.

Farmers are able to now use satellite imagery to map out their farmland while matching up grid soil samples and combine yield data within one-inch accuracy to determine the precise amount of fertilizer needed to replenish the soil for the next crop. The calculations can be done within the on board computer system inside the tractor. Varied amounts of fertilizer can be applied to save on money and time while maximizing yields.

Farmland lighter, sandier, soils can greatly benefit from variable seeding rates. The goal of farmers is to maximize yields from the available nutrient base while keeping input costs down. By cutting seed populations down from 35,000 seeds per acre to 15,000 seeds per acre on lighter soils, these plants will make use of the nutrients more efficiently by having less competition from each other which will create larger yields. Too high of a seed population will hurt yields. When using variable-rate seeding, the end result is less seed cost and higher yields.

Conclusion 

The U.N estimates that global agriculture will need to produce more food in the next 50 years than what was produced during the previous 10,000 years, putting more and more pressure on future farmers and the land they use to produce our food.

Traditional farming methods cannot keep up with growing food demand, but increased planted acres, biotech development, and precision farming will ease some of the demand. Rising commodity prices and growing demand for food will continue to drive innovation and new technologies, but farmers have an uphill battle to solve the world’s food supply.

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Caution Being Short The July Corn

By: Kevin Van Trump

I have been telling you for weeks to be careful 'bear" spreading or shorting the "old crop vs the "new crop" corn and or beans for that matter, and I think we are starting to see why. To add more confirmation, I urge you to remember we will still have close to 20 million more acres of corn to plant even after next week's USDA crop planting report. Throw in the fact that most producers have already marketed a large majority of their "old crop" corn, and the fact that the USDA may have simply been "hoping" that higher prices would curtail ending stocks to the level they have forecasted, is reason enough to heed serious warning to the recent basis explosion. This has been and continues to be a "demand" driven market...period. If the Eastern rail market continues to feel as if it may not be able to get enough corn to satisfy demand then watch out. As I mentioned in the opening comments, this market is not 2008 all over again. This market is more demand driven. If the Eastern rail market feels as if they will be unable to obtain the corn needed to fill demand they will continue to pressure and bid up the basis. I have producers in several areas of the Midwest that say they have never seen corn being loaded in the mass it has been lately on to rail and heading out of town. Many in the Midwest are starting to become a little more concerned that higher coastal premiums may eventually leave the midwest short corn later in the summer. With thes South somewhat hampered due to heavy rains you have to wonder just how much of the new crop will arrive early, how much will it need to be dried down, how will the quality be in comparison. With so many unknowns, more end users seem content on paying up now rather than risking the consequences of finding "NO" corn down the road, or having to pay huge premiums to get their hands on it. If the USDA was wrong in their estimates we could very well see one of the biggest short squeezes ever in the history of the corn market coming down the pipe in the July contract. I am not going to guarantee anything, but I urge you to be very careful listening to anyone that wants you to get short that July contract at this stage of the game. They may end up being right and the market fizzles out, but I simply see too much risk to try and prove your point at this stage. You may actually start to see "longs" in the marketplace starting to play for keeps. My thoughts are west end-users have become more concerned that they may not be able to secure corn later down the road. With this in mind they are willing to pay up aggressively now for the corn to secure their needs. Throw in the fact that poor pasture conditions in Kanas, Oklahoma and Texas have prompted many farmers to move cattle to the feedlots early, now forcing the feedlots to secure more feed which is also pressuring the bid. If some of the end users start to have trouble securing the bushels they need locally or from their regular sources it could become a very real possibility that you see longs actually try and take delivery of their July futures contract. Simply stated, "shorts" who are waiting for the "longs" to buy back their positions may be faced with the more realistic chance of having to deliver on their short positions. If you don't have the physical bushels to play this game and cover your short position I would simply steer clear. If you actually have the bushels and are looking to play the basis then that is whole different game. Remember, June options expire on this Friday, all I can say is keep your head on a swivel and start looking for the volatility in the markets to heat up even further.

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Cyclicals Bounce

by Bespoke Investment Group

Below we highlight the performance of the S&P 500 from 4/29 through 5/17 and over the last two days. From 4/29 through 5/17, the S&P 500 declined 2.54%, but the cyclical sectors got crushed. Energy was down 9.14%, Materials was down 6.93%, Industrials was down 4.26%, Financials was down 3.24%, and Tech was down 3.06%. At the same time, the Defensive sectors rallied! Utilities rose 2.80% from 4/29 through 5/17, while Health Care rose 2.39% and Consumer Staples rose 2.10%.

Over the last two days, the S&P 500 has risen 1.01%, but Energy, Materials, and Industrials have outperformed. On the other hand, the Utilities sector is down 25 basis points.

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