Big cut needed to US corn estimate to lift prices

by Agrimoney.com

US farm officials need, in one of the key crop reports of the year, to cut their estimate for the domestic corn yield by well over 3 bushels an acre to restart the rally in prices of the grain.

Traders - who have for weeks been speculating over the corn yield estimate in Thursday's US Department of Agriculture monthly Wasde crop report - believe on average that the forecast will be cut by 3.1 bushels per acre to 155.6 bushels per acre to reflect damage from July's heatwave.

Official meteorologists this week confirmed that July bought Oklahoma and Texas their warmest months on record and, crucially, in the US as a whole the "heatwave was characterised by unusually warm minimum temperatures, during nights and early mornings" – a particularly negative feature for pollinating corn.

The proportion of US corn rated in "good" or "excellent" condition has, over the last four weeks, fallen from 69% to 60%, with some of the big growing states seeing even bigger declines. In Illinois, the figure has dropped from 67% to 50%.

However, a downgrade in the USDA yield estimate at least as large as the market consensus suggests has already been factored into prices, analysts believe.

Trigger points

"We have dialled in a yield of about 155 bushels an acre," Don Roose, the president of Iowa-based broker US Commodities told Agrimoney.com.

"A yield figure of 153 or less and we would be up the limit," meaning a rise of the maximum $0.30 a bushel that the Chicago exchange (currently) allows on corn.

"A figure of 160 bushels per acre, and we would be down the limit."

Jerry Gidel, at North America Risk Management, estimated that a figure of 152 bushels an acre below "means we would not trade for two days" – meaning two sessions of limit-up prices.

Likely to be underwhelmed

At Australia & New Zealand Bank, Paul Deane estimated that a figure of 155-156 bushels per acre had been accounted for, saying that it would take a cut of at least 6 bushels an acre to foster a jump in prices.

"We think this is unlikely at this stage in the season, and so maintain the view that the market is likely to be underwhelmed by any [yield] changes," he added.

US Commodities believes that the estimate could easily be kept at 158.7 bushels per acre, noting that the majority of the crop, situated above a line represented by Interstate 80, had fared significantly better than that below.

"The question is did the better conditions to the north make up for the problems in the south?" Mr Roose said.

Data doubts

The impact of the yield figure on prices will also be complicated by a review the USDA is undertaking of its acreage forecasts in some states which suffered a particularly wet spring, with Mr Roose estimating a potential cut of 200,000 acres to corn plantings, and 300,000 acres to the soybean figure.

However, it also clouded by doubt over the likely accuracy of the USDA data, following a series of estimates which have been deeply questioned by traders.

"Industry believes that corn is in real trouble on yields due to a too wet spring planting season and the fourth hottest July in history," Tim Hannagan at PFGBest said.

"But the trade also believes the USDA is behind on its crop condition surveys and may not give a accurate yield estimates on corn, and that it may take until September or even harvest results on the October report for the true story."

Bearish risk

Sure, the report is the first of the growing season to be based largely on field observations, rather than estimates drawn from surveys and projections - but this does not necessarily mean it will give an accurate figure.

"This is not really the time of year that you get good yield estimates," Mr Gidel said, noting that they can still drop dramatically by harvest, as last year, when it fell from an estimate of 164.7 bushels an acre to a final figure of 152.8 bushels per acre.

Furthermore, the USDA will be using average data on issues such as ear weights to form its yield forecast, an issue some traders believe may end encourage a yield overestimate, given that is the potential for ear formation, rather than the density of plants, which is seen as the issue.

"If the USDA does end up using the five-year average ear weight, rather than what may actually be out in the field, it's possible the numbers could be construed as bearish as plant population was most likely on the heavy side for the majority of the Corn Belt," Jon Michalscheck at Benson Quinn Commodities said.

'Intolerable for the balance sheet'

Thursday's report will also be scoured for its estimate on the soybean yield, with traders, on average, expecting the USDA to trim its estimate for the figure by some 0.6 bushels per acre to 42.8 bushels per acre.

"A 42.8 bushels per acre yield, coupled with a 400,000 decrease in planted acres which could eventuate from the resurveyed states is probably intolerable for the balance sheet," signalling higher prices needed to ration demand, Victor Thianpiriya at ANZ said.

However, some analysts believe that the USDA may even raise the yield estimate, with the critical period for soybeans ongoing, and the crop heading into it without the damage suffered by corn.

The proportion of US soybean rated good or excellent is, at 61%, down a more modest three points over the past four weeks.

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Risk off with Italy and Spain collapsing-Major European banks in trouble

by the trader

Three words to describe today’s action. Volare for Italy (to fly), mierda in Spain (shit) and the US has it’s own plain crap, Bofa. Needles to say, the French banks also contributed to the melt down in European equities. With Italian banks struggling big time, Soc Gen joined the party (for real) today. With all major banks holding mega short gammas in their exotic books, look for further volatility and further panic, as the market offers absolutely no liquidity to hedge positions, unless you are going to buy VIX at these somewhat elevated levels….As The Trader has been arguing over the last four months, risk has been mispriced for very long time.

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Analysis: More austerity may be the last thing Italy needs

By Gavin Jones

(Reuters) - Italy's problem is not a high budget deficit but chronically weak growth, and forcing it to frontload austerity measures just as its economy is moving into yet another downturn may prove dangerously counter productive.

After a massive sell-off of Italy's government bonds threatened to make the euro zone debt crisis totally unmanageable, the European Central Bank agreed on Sunday to buy Italian bonds on the market, but only on stringent conditions.

The ECB, supported by the French and German governments, demanded Italy bring forward plans to balance its budget by one year to 2013 and urgently adopt reforms to liberalize its hidebound economy and boost growth.

Backed into a corner, Prime Minister Silvio Berlusconi accepted.

The second goal is vital and long overdue, but the first seems like a panic response to the recent market turmoil -- which has also swept up Italy's banks -- and could undermine the prospects for recovery and even for public finances in the medium term.

To respond to the ECB's prescription Economy Minister Giulio Tremonti must now frontload 20 billion euros of deficit cuts which could tip an already weakening economy into recession.

Early indications of measures considered, such as a wealth tax, cuts in welfare benefits and slashing tax breaks for firms and families will do nothing to help stagnant domestic demand.

"This latest fiscal tightening will definitely hit the economy, private consumption is going to be significantly weaker," said Barclays Capital analyst Fabio Fois.

He said in response to the latest news that he was in the process of cutting his growth forecasts for Italy, which stood at an anemic 1.0 percent in 2011 and 1.1 percent in 2012.

Berlusconi promised on Wednesday an emergency decree to approve austerity measures but faced union opposition over concern that the cuts would hit ordinary Italians.

A failed debt-cutting drive, if it also derails the structural reforms the economy desperately needs, could be the worst outcome of all.

"If the austerity budget hits the usual suspects we will mobilize to change it," Susanna Camusso, head of the CGIL, Italy's biggest union federation, told reporters after a meeting with ministers.

GROWTH LAGGARD

In the last 10 years, average Italian growth has risen less than 0.3 percent per year, making it not only the most sluggish economy in the euro zone but the third most sluggish in the world, ahead of only Zimbabwe, Eritrea and Haiti.

In the same period it was the only advanced economy to see a contraction of per-capita gross domestic product, hourly productivity has been stagnant and Italians' real purchasing power has fallen by 4 percent.

When the euro zone goes into a recession Italy goes into a deeper one, but when the rest of the euro zone recovers Italy's rebound is weaker. It has still regained only two of the seven percentage points of output it lost during the 2008-9 recession.

This wasting disease is Italy's curse, not a budget deficit which, at a targeted 3.9 percent of GDP this year is already below the euro zone average and is forecast by international bodies to remain so in coming years.

Indeed, until the summer, one of the main reasons Italy had stayed on the sidelines of the debt crisis was the prudent fiscal policy pursued by Tremonti, who kept a lid on spending and eschewed any significant stimulus during the recession.

Bank of Italy chief Mario Draghi was reportedly the co-author of a letter from the ECB to Italy's government telling it to balance the budget faster, yet in a keynote speech just two months ago Draghi called the 2014 target date "appropriate."

Even before the news of tougher austerity to come, analysts said a modest growth recovery in the second quarter, when GDP rose 0.3 percent, was already over. Some forecast that the economy could even contract between July and September.

Recent data has been dismal. Industrial output fell 0.6 percent in June after an identical decline in May. Purchasing managers' indexes for the last two months have pointed to an economy in stagnation at best, and business confidence in July fell for the fourth month running to its lowest level for a year.

DEFICIT CONTROL

Markets are likely to react just as badly to a further deterioration in Italy's economy as they are to any fiscal slippage of which, in any case, there has so far been no sign.

In the first seven months of the year, the central government budget deficit was 5 billion euros lower than in the same period of 2010.

One of the first triggers of what began as a gradual market attack on Italy were cuts in its ratings outlook by Standard & Poor's in May and then by Moody's a month later.

Yet neither agency called for accelerated deficit cuts. Rather, in strikingly similar analyses, they said weak growth and an inability to pass reforms threw doubt on the prospects for bringing down Italy's huge public debt in the medium term.

Italy's debt, like its deficit, has risen far less than those of its main partners, but at 120 percent of GDP it is still second highest in the euro zone after Greece's, and at 1.8 trillion euros is second only to Germany's in absolute terms.

Of course if Italy slashes new borrowing its stock of debt will also fall. But permanent austerity is unsustainable and the debt-to-GDP ratio will drop far more easily if it can match even modest deficit curbs with halfway decent GDP growth.

Only if it responds to that challenge does Italy have any hope of ending its inexorable decline and, more urgently, of avoiding a cut in its credit rating next month.

"Moody's review of Italy's sovereign rating will focus on the growth prospects for the Italian economy in coming years, and particularly the prospects for a removal of important structural bottlenecks that could hinder a stronger economic recovery in the medium term," the agency said in June.

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Fed: Big Bank, Big Profits Through 2013...Guaranteed

By Tim Iacono

Well, it looks like it’s one down, three to go for the Federal Reserve as they promised to keep short-term interest rates freakishly low for at least the next two years (and possibly much longer) while holding in reserve three other options – changing their mix of assets to lower long term rates (which doesn’t appear to be necessary at the moment), spurring banks to lend by paying less on excess reserves, and, of course, the big kahuna of about a trillion dollars more in Treasury purchases, otherwise known as “QE3″.

By promising to keep rates low “at least through mid-2013″ in the policy statement released, the central bank assured the nation’s big banks of continuing to make big profits for the next two years on the interest rate spreads.

Of course, this will continue to punish the nation’s savers who, for the foreseeable future, will be looking at rates of one percent or less for certificates of deposit.

Good luck, risk averse seniors…

There were three voting members of the Fed who disagreed with this action – Richard Fisher, Narayana Kocherlakota, and Charles Plosser – so, retirees will at least have some company in objecting to yet another first-of-its-kind monetary policy move that benefits the big banks and hurts the little people.

The Fed also downgraded their outlook on the U.S. economy, noting that growth has been “considerably slower” than they expected so far this year with indicators suggesting “a deterioration in overall labor market conditions”.

As usual, the two statements are shown side-by-side below.

About the only other important change in the statement was the acknowledgment that the slowdown in growth has not just been due to temporary factors such as the disaster in Japan and high energy prices, the committee noting that these factors “appear to account for only some of the recent weakness in economic activity”, meaning that, we probably won’t hear the word ‘transitory’ from the Fed for quite some time.

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Why a U.S. Default Will Be a Good Thing

By Martin Hutchinson

Now that Standard & Poor's has finally slashed its U.S. credit rating, it's more apparent than ever that a U.S. default is imminent.

So if you're at all panicked by S&P's decision to downgrade the country's top-tier credit rating - and the resultant freefall in U.S. stock prices - brace yourself: It's going to get a lot worse before it gets better. But make no mistake, it will get better.

In fact, at this point, a U.S. default is the only conceivable remedy to our debt affliction.

Here's why ...

The Wrong Road

The United States has been able to coast on its top -tier credit rating for far too long. The truth is, this country stopped being a AAA credit risk in early 2007.

That's when the Bush administration's excess spending and military forays into the Middle East sent us down the wrong road and ultimately drove the fiscal 2008 federal deficit to more than $400 billion. That's despite the fact that the economy was at the top of an economic boom at the time.

It's true that our fiscal position has grown substantially worse since then, but that's mainly because of the G reat R ecession of 2008-09.

Even if an imaginary amalgam of Calvin Coolidge and Bill Clinton had been in the White House since 2008, inheriting the overspending already built into the system, the federal deficit still would have reached $700 billion to $800 billion over the last few years.

Just the bailouts of Fannie Mae, Freddie Mac, General Motors Co. (NYSE: GM) and Chrysler would have added enough to the structural costs of recession to push the arithmetic off kilter.

The Bush administration's additional spending in 2008, U.S. President Barack Obama's $800 billion-plus of "stimulus," and the g rotesque addiction that Congress continues to have to subsidies for farmers, ethanol, and idiotic "green" energy projects have all made the position worse. But they only account for about half of the annual deficit.

Of course, while recent political decisions don't bear much responsibility for the current lousy U.S. position, our current crop of politicians have been - and will continue to be - ineffective in their attempts to emerge from it. 

The Slippery Slope

Far from representing $1 trillion or even $2.5 trillion in spending cuts, the recent debt-ceiling agreement will actually produce less than $100 billion in cuts, all in the fiscal years ending September 2012 and September 2013. Cuts beyond those dates will require further titanic efforts by future politicians.

Additionally, no major cabinet department has been abolished - or even downgraded. No major military operation has been terminated. And no major entitlement program has been cut. On the other side, even the low-hanging fruit of ethanol subsidies has not been eliminated from the tax code, and it seems very unlikely that taxes can be raised high enough to affect the problem without putting the U.S. into an even deeper economic hole.

Meanwhile, the recession that has already lasted nearly four years is showing no sign of giving way to healthy growth. Massive budget deficits and massive growth of debt are inevitable under these circumstances.

Therefore, the U.S. credit rating is on a slippery slope, and more downgrades are inescapable.

Standard and Poor's already has said there is a one-in-three chance of a further downgrade. And i t seems unlikely that Moody's Corp. (NYSE: MCO) and Fitch Ratings Inc. will maintain their top-tier ratings on U.S. credit since their competitor has already downgraded it.

From here on out, each incoming downgrade will be met by dire predictions of gloom, a slump in the stock market, a boom in gold prices - and, extraordinarily, by a further decline in U.S. Treasury bond yields.

Future Credit Downgrades and a U.S. Default

The idea of a decline in the safety of U.S. Treasuries causing a flight to safety in which investors buy still more U.S. bonds is a sign that markets are truly irrational.

But if nothing effective is done, this game eventually will come to an end. As the U.S. credit rating is downgraded again and again, somewhere this side of BBB-minus (the lowest "investment grade" rating) the markets will finally panic and decide that U.S. deficits can no longer be supported. That will make it impossible to sell enough Treasuries to finance America's debt burden.

As in the case of Greece last year, this is likely to happen quite suddenly. And when it happens, the market's negative verdict will be irreversible.

Furthermore, since there is no kind Sugar Daddy such as the European Central Bank (ECB) standing by with its force of German taxpayers ready to bail out the U.S. Treasury, the U.S. will be forced to default.

That will be very painful in the short run, but in the long run will be a good thing.

After all, there is no reason why governments should be considered better credit risks than top- quality companies.

The Proctor & Gamble Co. (NYSE: PG) and The Coca-Cola Co. (NYSE: KO) make tangible products that people want to buy - and they do so at tightly controlled costs. So it's clear that companies like these can repay modest levels of debt under almost any circumstances.

The same is not true for a government - especially one that makes no money itself, produces few goods and services of value, and obtains money only by squeezing its unfortunate taxpayers. Just imagine a world in which investors won't lend to governments: That's a world in which governments cannot overspend - they won't have the money.

That's a world in which resources cannot be diverted from the productive to the unproductive. That's also a world in which economic power is determined by success - and one in which the chairman of Coca-Cola has more credibility than the U.S. Treasury s ecretary. Our leaders down in Washington may think that such a world is pure hell - a civil servant's version of Dante's Inferno.

But for investors like you and me, a world like that - where everything makes sense - is a financial Nirvana.

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VIX HIgh, Time To Buy?

By Frank Holmes

There’s an old contrarian investing maxim from Baron Rothschild that says “the time to buy is when there’s blood in the streets, even if the blood is your own.” The idea is that the best investors strategize when others panic, allowing them to buy stocks on “sale.” The legend of Warren Buffett was built on this philosophy during the market turmoil of the mid-1970s.

There was more “blood in the streets” Monday as the world continued to digest S&P’s downgrade of U.S. debt, the two-week market selloff, and the likelihood the U.S. economy could possibly slide back into recession. These concerns, combined with continued political/economic struggles in the eurozone from socialist policies, have created a potent concoction of fear across global markets and sent volatility skyrocketing Monday to its highest level since the May 2010 “Flash Crash.” While many investors are running for the exits, others have chosen to ride the wave of volatility or buy depressed shares.

The S&P 500 Index has fallen 11 percent over the past three trading sessions. This has only happened fives times since 1960: The 1987 Crash, the Asian financial crisis in 1998 and twice in 2008, according to research from Desjardins. In each of these instances, markets gained an average 9 percent the following month.

The CBOE Volatility Index (VIX) rose more than 46 percent to break the key 40 level, signaling an extreme event, and is up over 164 percent for the year. In general, any time the VIX reads above 30 means conditions are volatile. Above 40, it’s clear the only thing at a premium in this market is fear.

The S&P 500 isn’t the only investment that’s been experiencing extremes. A flood of safe-haven buying sent gold prices up more than $50 an ounce (more than 3 percent) to $1,715.40 at market close Monday. Gold continued its climb early Tuesday morning, rising another $34 an ounce. Gold prices are up over 46 percent for the past year and roughly 13 percent the past 30 days. The increase over the past month is roughly equal to gold’s normal volatility over an entire year and is a short-term risk for a minor correction in a secular bull market.

Meanwhile, oil (along with oil-related equities) has been bludgeoned down to price levels not seen in a year—off almost 30 percent from April 2011 highs. Other commodities such as copper, wheat and cotton have also taken sizable haircuts over the past two weeks.

Such market turmoil creates a real challenge for investors who are in it for the long haul. Investors must control their emotional response and remain on the lookout for opportunities. Equity performance and fear-driven volatility carry a strong inverse correlation.

This chart shows sharp spikes in the VIX trigger an autonomic selloff in the S&P 500. However, these selloffs have historically resulted in strong rebounds, thus providing an opportunity for clever investors who like to buy their summer clothes during a winter sale and their winter clothes during the summer.

Before Monday, the VIX closed above the 40 level five times since 1995, and in all but one occurrence the market was at higher levels just three months later. The exception is 2008, when the VIX passed 40 on its way to 90 and remained elevated for months during the worst financial crisis since the Great Depression.

You can see from the table that the market has rebounded roughly 6 percent on average over the three-month period after hitting the 40 mark. Short-term reactions are more mixed. The market has swung 11 percent in either direction during the next month of trading and the average gain is only 80 basis points.

For the purposes of this exercise, the analysis is based on weekly data from August 8, 1995 through August 8, 2011. There were stretches of time, such as in 2008, when the VIX remained above 40, but we’re only counting the initial breach.

Market selloffs are actually common this time of year. According to the Stock Trader’s Almanac, August has been the second-worst month of the year for the Dow Jones and S&P 500 since the 1987 crash. The 7.2 percent decline for the S&P 500 last week was the worst week ever recorded during the month of August, beating out another dismal week for performance in 1974.

With this in mind, investors must remember there are some good opportunities out there and we’re working relentlessly to find them. Some of the best are in great American companies, whose balance sheets are the envy of Washington, with many carrying dividend yields above the 10-year Treasury bill. Currently, the 2.28 percent yield for the S&P 500 is the highest level since July 2009, Desjardins says.

A similar phenomenon took place following banking crises in France, Sweden and the U.S. during the 1990s. Without the ability to tap banks for additional capital, companies moved to large positive cash-flow positions and self-financed their growth, GaveKal research said in a note this morning. These strong capital structures provided the foundation for the market’s bull run during the back half of the decade.

This opportunity has largely been ignored as investors have fled like lemmings to the “safety” of cash, government bonds and money market funds. These investments “afford zero prospects for capital gains and only microscopic income,” says Murray Pollitt from Pollitt & Co.

This mad dash for cash is driven by fear and investor desperation to preserve their money rather than make any. Naysayers have been flippantly labeling gold a bubble since it reached $500 an ounce, but have turned a blind eye to the unprecedented amount of “money pouring into government bits of paper” that is the “biggest bubble of all time,” says Pollitt.

History is filled with cycles and each asset class carries its own DNA of volatility. Those who are highly leveraged or those forced to sell in order to raise capital are experiencing the most pain right now. Investors not in those two camps must remember that the markets are cyclical, just like the tide, which comes in and out each day, and the moon, which cycles every 29 days.

One area with potential is gold equities, which have lagged bullion significantly this year, pushing the gold-to-XAU ratio to the second-lowest level in nearly 30 years in June. Gold stocks also have a history of performing well when the U.S. economy hits a bump in the road. Depression-era babies might remember gold stocks’ strong performance during the 1930s.

This lag sets the stage for a possible strong rally in gold equities relative to bullion once mean reversion to historical levels kicks in, just like it has done time and time again. Desjardins notes that one current catalyst for a rebound in gold stocks is increased profitability from rising gold prices and decreased input costs due to oil’s 28 percent decline off of 2011 highs.

In addition, many quality gold companies are “paying investors to wait” by increasing dividend yield rates above those of money funds. This creates a cash incentive to hold shares of the company and allows investors to participate in rising earnings.

A key question for the global economy is: Who will lead a recovery in global markets? Where will growth come from?

With trillions of dollars in debt acting as a ball-and-chain for much of Europe, the U.S. and the rest of the developed world, must detoxify their balance sheets before hitting the ground running. On the other hand, emerging market economies carry low levels of debt and operate like a cash business, making them the final frontier for strong economic growth.

A key reason is emerging market governments have the long-term policies in place to facilitate growth of their economies. GaveKal points out it’s unlikely we’ll get a second dose of large stimulus like we did in 2008-2009 because of inflationary pressures, but that magnitude of assistance isn’t needed. Because China and other emerging market governments focused their stimulus on job creation and infrastructure development, their roads to economic growth have already been paved.

This will allow them to flex their economic muscles during short-term instability and insulate them from the turmoil. This is why we think emerging markets will continue to shine for many years to come.

Take China’s $300+ billion commitment to construct a nationwide high speed rail network, for example. The project is already paid for and will invigorate consumption across all sectors of the economy by connecting 700 million people across 250 cities. The recent accident was a terrible tragedy but the country is not going to abandon its plans. Rather, China will learn from the setback and push forward with better safety standards.

While the investment herd rushes into CDs and other “zero” yielding investments, nimble-minded investors can use these cycles to seize current opportunities and position portfolios for when the bull market tide returns.

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