Corn price to fall to low $4s a bushel - Macquarie

by Agrimoney.com

Macquarie signalled that prices are on course to fall to the low $4 a bushel as it warned investors against foreseeing a steep downgrade to the US acreage estimate which shocked investors two weeks ago.

The bank, already one of the more downbeat commentators on corn prices, in May forecasting Chicago corn prices averaging $4.50 a bushel in the October-to-December quarter, said that values were for a time likely to fall well below that level.

"We are likely to test significantly below this [$4.50-a-bushel] level in the October-to-November period," Macquarie analyst Chris Gadd said.

The forecast reflected an "increasingly negative outlook", after the US Department of Agriculture stunned investors on June 28 by estimating domestic corn sowings at 97.4m acres – 2.1m acres more than expected by analysts who had reckoned on extensive losses to a wet US spring.

Many commentators continue to believe in a further downgrade to the US corn sowings forecast ahead, with the lateness of sowings seen questioning the accuracy of the US data.

'Lose a little area…'

However, while "at the headline level this thesis seems to have merit, once you breakdown into the detail of the plantings the USDA's current forecasts look all the more reasonable", Mr Gadd said.

He acknowledged that there were instances of corn sowings ending up far smaller than USDA June reports have indicated, with the recent peak in 2008, when the briefing was revealed to have overestimated sowings by well over 1.0m acres.

"But whilst we do see variation from the June report to final plantings, the area change has normally been less than 1m acres and on average only 300,000 acres," he said.

In years such as 1995 and 2011, similar to this year in showing delayed plantings, the declines had been close to this average level.

"The conclusion should be that we will most likely lose a little area from June report to the final plantings estimate, but the area shift is unlikely to be material enough to change a bullish or bearish call."

Supply hopes

Furthermore, hopes for the crop have been raised by the improving condition of the crop, which has continued to improve from a somewhat below-par start to stand at 67% good or excellent as of a week ago.

"Corn condition ratings have increased to what would be considered a normal level for this stage of the year," and warranting a yield estimate of 158.8 bushels per acre.

These figures suggested a crop of 14.229bn bushels, and carryout stocks at the end of 2013-14 of 2,338bn bushels, more than three times those of the end of this season.

Carryout stocks, in indicating the level of supplies and the degree of competition buyers face to obtain supplies, are an important pricing influence.

"As it now looks more likely that we will have a large US corn crop the bearish outlook becomes more certain," Mr Gadd said.

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Weekly Price Performance

By Dominick Chirichella

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Stock market pushed, pulled by geopolitical developments

By Jeff Greenblatt

We’ve have to talk geopolitics this week. I’ve told you in the past that Morsi was trouble, and the early days of his administration resembled the early days of the Third Reich as far as foreign policy is concerned. Lucky for the world, he’s only an amateur despot with none of the charisma of the really dangerous people in history.

I’ve probably studied World War II as much as anyone who hasn’t been published on that subject so there’s a certain expertise. Morsi tried to play peacemaker while at the same time scheming in the background how to be at the forefront of a new Pan Arabic movement that would not stop until Jerusalem became its capital. That’s right, there’s no way of sugarcoating it. I’ve seen several of the speeches. How serious the true threat is hard to say, but the world didn’t take the Nazis seriously in the beginning either. So a threat is removed. The difference here is the Egyptian people were not supportive, while the German people of the 1930’s stood by in silence and allowed it to happen.

But let’s not bury our heads in the sand. There’s an element of Islamic Jihad active as they are in all the Arabic countries to the Middle East. They are not going without a fight. The problem going forward is the Egyptian military looks good, has the weaponry, but they are not trained very well in the field. Are they fat and lazy? Perhaps a little bit, but they will get tested by the Muslim Brotherhood. The best tweet of the week was “take the Army and give the points.” So I’d give them the edge. A lot of the future is going to depend on how much support the Muslim Brotherhood gets from the Russians and/or the Chinese. Later on, if it gets to that point, they still must have another election.

What we found out this week was the market seemed to like the removal of Morsi yet the initial knee-jerk reaction was fear and that’s reasonable. Who knows what could happen in a coup? What amazed me is that gold nearly collapsed during this event. In the old days, any geopolitical threat was a reason to buy precious metals. How times have changed. Today, many people view the drop in gold as a sign the economy is improving. They are right to a point; the economy was good in the 20-year bear market for gold. But the yellow metal skyrocketed in the last decade when the economy was supposedly good, even if it was powered by smoke and mirrors.

At this point I think gold is dropping because there’s a potential threat of deflation. The Greenback is pushing higher and the kicker is going to be how the stock market responds. During the 1990’s in the better economy, the dollar and equities skyrocketed. An economy where the equity market grows with the currency means its increasing in wealth. If its increasing in wealth there’s no threat of deflation as we saw in the '90’s. It was a low inflationary cycle. The actual term was disinflation. But if we continue to get an inverse relationship where the dollar accelerates at the expense of the stock market, we’ll have a problem.

For me, the problem has been when the Greenback pushed the 90 handle. Each time it did, the stock market was in serious correction mode. So if the dollar keeps going up, gold continues to decline and the stock market backs off we’ll move closer to deflation. If the stock market stays in gear with an increasing dollar and a declining yellow metal we’ll have an economy similar to the 1990s, except for one thing: We won’t have a bubble.

In certain circles, I’ve seen there are people who think the stock market is about to be a bubble. Nothing could be further from the truth. We are in a bull market, a secular bull market where the pattern has reached the path of least resistance: up. Why does that have to be a bubble? Remember earlier in the year when I told you people would have a problem with a market that goes to new highs? They don’t know what to think about it. We haven’t had to deal with this sort of thing since the '80’s and '90’s. Most market participants are used to dealing with markets that top when they get to all-time highs. But there’s very little euphoria out there. If anything, there’s a wall of worry concerning the Fed and interest rates. If anything, the market has to prove it can go up without help from Fed stimulus.

So Europe closed the week lower as the DAX got blitzed. Now for the first time in 8 months we must make the determination of whether Europe is leading to the downside or North America is the new leader to the upside. If we go by the Russell, we get a very bullish message because small caps have been leading to the upside for the first time in a long time. Judging by the small caps our end of the world action from 2 weeks ago Monday gave us an excellent trading bottom. It’s hard to imagine Europe is ready to violate it so soon. Europe could also be sending a different strange message. Last week the ECB diverged from the Fed by suggesting they intend to keep rates low for a long time, perhaps even exploring real negative rates. We also have political and financial unrest in Portugal. Finally we have the situation in Egypt. Perhaps European traders have not sorted out how they should feel about these 3 events. We could see a month of instability and perhaps a trading range which diverges from our bullish leg up.

So here’s how I’m viewing this market. The best looking chart is the NDX with a potential wedge 7 weeks out from the next real important turn windows. Finally, it shouldn’t surprise anyone the bond market belted out a new low. In this case, our training program shows you exactly why this happened. We had a combination of a perfect Gann square of 9 plus a really good supply imbalance point which pushed prices quickly to a new low. It’s the bond market which is the greatest threat to the economy for the rest of this year.

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This Resilient Commodity to Ready for a Big Comeback

By John Whitefoot

For many investors, 2013 was supposed to be the year that silver regained its luster. Most economists thought silver would climb as a hedge against inflation and be a devalued dollar on the heels of continued economic turmoil. Or, assuming the economic rebound was in full swing, it would grow due to industrial demand for everything from solar panels to electronics, batteries to the automotive industry.

Strangely, none of that happened. Silver benefits by being both a precious metal and an industrial metal. As an industrial metal, investors need to actually see enough economic growth before they can ride that bandwagon. As a precious metal, silver is being taken along for the ride by investors fleeing gold.

In fact, silver is being treated more like a precious metal than an industrial one these days. The following chart shows that silver, over a 50-day period, shares a 0.98 correlation coefficient with gold (a 1.00 result would mean the two move in perfect step with each other).

Instead of being the 2013 star of the precious metals community, silver has turned into the dog. Trading near $19.70 an ounce, silver has lost more than 35% of its value since the beginning of the year (and on track for its worst performance in almost 30 years). Gold, on the other hand, has dropped just 25%, while platinum is down about 13%.

Chart courtesy of www.StockCharts.com

But for contrarian investors, silver has never lost its shine—its role as a safe haven hasn’t really changed. The U.S. economy continues to be fragile. Unemployment is hovering at 7.5%, first-quarter gross domestic product (GDP) growth came in well below expectations, home values are still 25% below their pre-market crash levels, wages are stagnant, and the number of Americans relying on food stamps is at record levels. On top of that, the eurozone continues to be in trouble with Portugal surfacing as the latest victim, China’s economy is stalling, and global bailouts are still in place.

In spite of silver’s retreat, all of the ingredients for a rally are still set—a fact that has not been lost on the average American investor. According to the U.S. Mint, during the first half of 2012, it sold approximately 17.37 million one-ounce American Eagle silver coins. During the same period in 2013, it sold 25.0 million Eagles—a year-over-year increase of 43.9%. In fact, the U.S. Mint is predicting that its gold and silver coin sales could reach record numbers in 2013. (Source: “2013 American Eagle Bullion/Sales Figures,” U.S. Mint web site, July 4, 2013.)

Investors who have been watching silver for a number of years know that the precious metal can bounce back. In March 2008, silver was trading near $21.00 an ounce, and by October, it had fallen 60% to around $8.40; however, by April 2011, it had bounced back, soaring over 400%.

Interestingly, if you look at silver’s long-term trend dating back to 2002, you’ll see that it currently is nearing its support level.

While silver has clearly declined, as long as the global economy remains uncertain and central banks continue to print more and more money, silver will continue to be in demand as a store of value.

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The One Company to Watch as the U.S. Dollar Strengthens

By Sasha Cekerevac

With corporate earnings season starting today, many investors will eagerly be looking at the results to determine if there is an investment opportunity for the next six to 12 months.

But wise investors will also be keeping an eye on the macroeconomic situation: we are entering a period of time in which the U.S. dollar will remain strong as our economy is set to outperform those of most other developed nations. As I’ve previously mentioned in these pages before, the outlook for the eurozone remains weak, China’s economy is slowing, and Japan’s economy is just now trying to emerge from having virtually no growth over the past decade.

The strength of the U.S. economy is relative—though it is better than its competitors, it is not growing at a very rapid rate. However, remember: the strength of a currency is based on relative value, not absolute.

That relative strength in the U.S. economy will translate into a stronger dollar, higher corporate earnings and investment opportunities. As a large investor, for example, I would much rather be invested in U.S. assets than European assets.

While a stronger dollar hurts exports, it improves the corporate earnings of importers. A perfect example of the recent shift is Starbucks Corporation (NASDAQ/SBUX).

The investment opportunity that Starbucks is able to monetize is the strength of the U.S. dollar as compared to currencies like the Brazilian real. Combining record-level harvests of coffee beans this year and last year with the real hitting a four-year low, the price of Brazilian coffee beans has dropped dramatically. Similarly, Columbia’s currency has also dropped significantly against the dollar, and has seen exports of its coffee beans increase significantly this year.

That lower cost of imported commodities for companies like Starbucks is creating an investment opportunity by generating higher corporate earnings. It’s a perfect example of a U.S. company benefiting from a stronger dollar.

Chart courtesy of www.StockCharts.com

Clearly, I am not alone in thinking that Starbucks will generate strong corporate earnings, as indicated by the strength of the above chart.

Starbucks is a company that continues to grow worldwide, as it sees an investment opportunity in building its brand globally. The reduction in the input cost of coffee beans will also help the company improve its corporate earnings, in addition to top-line revenue growth from expanding into new markets.

The point I would like to make is that, as investors, our goal is to look for companies that can increase their corporate earnings through an investment opportunity that suits their business models. Whether it is a higher dollar or a weaker dollar, it really doesn’t matter, as there are firms that can generate higher corporate earnings in either case. The key is to shift and reallocate assets into companies with higher probabilities of generating corporate earnings.

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About That Supposed Correlation of the U.S. Dollar and Gold

by Charles Hugh Smith

The supposed correlation of the U.S. dollar and gold is not visible in the 5-year charts.

One of the most widely accepted truisms in what passes for our financial media is that the dollar and gold are correlated: when the dollar weakens, gold rises, and when gold rises, the dollar declines.

Nice, except this vaunted correlation isn't remotely visible in the charts. Let's have a look. Here is the 5-year chart of the DXY Dollar Index, the most widely quoted measure of the U.S. Dollar:

And here is a 5-year chart of GLD, a proxy for gold:

I've marked the charts up seeking the sort of correlation that is accepted with near-religious faith and come up with near-random fluctuations. Let's start with the basics of correlation:

1. Do the peaks and troughs align? No, they don't. If gold and the DXY were correlated, we'd expect gold to bottom when the dollar peaked and the dollar to hit its lows at gold's peak. Instead, we find gold was rising when the dollar hit its last peak in mid-2010.

At gold's peak, the DXY was around its previous lows hit in 2008 and 2009. At the dollar's previous low in 2008 at 72, GLD was around 100; at the dollar's next low in late 2009 at 74, GLD was around 110. At the low in 2010 at 73, GLD was 150.

Conclusion: the peaks and troughs do not align--not even close.

2. Do the trends up and down align inversely? In other words, when gold is rising, is the dollar declining, and vice versa? Nope. The supposedly inversely correlated DXY and GLD have risen in tandem for several significant stretches of time.

We can play mind-games and claim the correlation inverted during these periods, but what would we base this claim on? Why did the correlation invert during these periods?

3. Were major uplegs/downlegs matched by similar percentage moves in the other index?If there was any sort of real correlation, we would expect to see a 30% rise or fall in one align with a similar-sized inverse move in the other.

For example, gold dropped by 30% since October 2012, yet the DXY rose a mere 5% in that period, crossing a price line it has crossed 9 times before.

When the DXY rocketed up 20% from late 2009 to mid-2010, we'd expect gold to plummet by 20% in the same timeframe. Instead, gold rose in tandem with the dollar.

4. If one has climbed by 70% since late 2008, the other should decline by roughly 70%.Instead, the dollar is back where it was in late 2008 at 84, a price level it has crossed 10 times since late 2008.

Gold has risen 70% from its late-2008 level. How are these dramatically different price movements correlated?

Conclusion: there is no correlation between gold and the U.S. dollar index. Not even close.The two move independently; any apparent correlation is semi-random signal noise. They are not on a simplistic see-saw.

In my view, this reflects the complex dynamics at work in pricing gold and the U.S. dollar:

Is There Any Correlation Between the U.S. Dollar and Gold (Or Anything Else?) (November 14, 2012)

The Tailwinds Pushing the U.S. Dollar Higher (March 27, 2013)

What Will Benefit from Global Recession? The U.S. Dollar (October 9, 2012)

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