New USDA Crop Progress Report

The USDA just released its latest crop progress report.

Most of the grain crops look to be in pretty good shape, with the exception of soybeans, which are still behind schedule.

Wheat's been slammed the past few days after a speculative run-up, so it appears this news was priced in. Not much movement from corn and soybeans.

It still looks like soybeans are the most intriguing play in the grains complex - with strong demand expected to continue from China, and a harvest running behind schedule.

Wheat, Corn Stocks Still at 30-Year Lows

Despite record harvests last year, corn and wheat stocks are still sitting near 30-year lows.  Which means, anything short of a bumper crop could send the grains skywards once again.

Here are some very cool charts, courtesy of Chris Mayer at DailyWealth, that depict the stocks-to-use ratios of of wheat and corn since 1970, versus their inflation-adjusted prices.

Investing in grains is actually pretty easy - when supplies are low, and prices are low, you know prices should eventually go up.  Then, at some point, high prices spur enough new supply onto the market that prices come down.  Ideally, that's when you go short!

You'll notice from the charts that grain stocks and prices move in fairly long cycles - about 15 to 20 years in length.  It takes time to bring new supply online, to replenish stocks...ultimately to rebalance the supply/demand situation.

This time should be no different.  China is industrializing in a big way, and its citizens have taken a liking to eating, a habit they're not likely to give up, no matter how bad the global economy gets.  Most notably, they are adopting Western style high protein diets, with lots more meat...and livestock require a lot of grains to raise.

Bottom line - it's safe to tune out the talking heads on TV when thinking about agriculture...just focus on supply and demand.  It's that simple.  When demand exceeds supply, prices will rise, until supply is able to overtake demand.  Sure, things like currency devaluation, a falling dollar, will toss fuel on the fire...but at the end of the day, it's all about supply and demand.

Stratfor: Major Drought is Threatening Argentina's Agricultural Production for 2009

Stratfor reports that a major drought is threatening Argentina's agricultural crop for 2009.

According to the projections of the Buenos Aires Cereals Exchange published on Jan. 16, the country’s wheat yield for 2009 will be 8.7 million metric tons, down from 16.3 million in 2008 (domestic wheat consumption in 2007 was approximately 6.7 million metric tons). Total wheat planting dropped by 350,000 hectares, or 8 percent, in the 2008 planting season, and the drought has affected what has already been sown. Corn production is projected to drop from its 2008 figure of 20.9 million metric tons to 16.5 million metric tons, with a reduction in crop planting by 26 percent from 3.2 million hectares in 2008 to 2.4 million in 2009. Soybean output, meanwhile, could fall to 40 million metric tons if the drought continues — a 7 million metric ton drop.

Corn, Wheat, Soybeans Slaughtered After USDA Projections

Grain futures plummeted today after the USDA issued it's supply and demand report, which projected larger supplies than previously forecasted. You can read the gory details of the full report here - or glorious details - depending on which side of the trade you were on.

Corn, soybeans, wheat, rough rice all basically closed "limit down" on the day, dropping the maximum allowable amount.

Wheat takes a nosedive after reading the USDA report.

My personal take on this report - in a word, "ouch." Can't say I saw this one coming - grain charts had been looking quite frisky of late, or so I thought - it's probably safe to call the grains bull dead for a little while after reading the supply/demand breakdown. I'm going to try and keep what powder I have left dry for awhile, so that we can reload down the road.

Commodity Futures Weekly Review - January 11, 2009

Now for the weekly review of our commodity futures positions - current as of January 11, 2009.

First, our top blog posts from the past week:

• Is It (Finally) Time to Short US Treasuries - And Make a Fortune?
• China Starting to Regurgitate US Debt
• Marc Faber on Bloomberg: World War III Has Already Begun
  

Also our coverage of Jim Rogers' and Marc Faber's Commodity Picks for 2009 was the 2nd most popular article on Seeking Alpha for much of the week.

A review of our trades and positions from the previous week:

• Sold our mini-gold futures contract - to make way for another grains contract. This was a position sizing move - gold had not yet hit our sell stop.

• Also sold our one cocoa futures contract - also for position sizing purposes. Cocoa was not performing as well as wheat, so we decided to add to our wheat position.
  

• Bought one more wheat futures contract - wheat put in a strong performance this week, up $0.20.

• Continued to hold one corn futures contract. This was an attempt to "pyramid" our grains position and diversify. Corn was up $0.02 on the week.

• Continued to hold one cotton futures contract - we LOVE cotton at these prices - as we've discussed with before in this space. Cotton was up slightly on the week.

• And finally, the dunce cap so far goes on our decision to eat our own dog food and short the 10-Year Treasury Note. We haven't lost hope yet, but will have to exit this position if new highs are hit. It won't be the first time we've gotten burned on this trade.
  

Commodities that appear quite beaten down - but we don't own them...yet...

• Sugar
• Coffee
• Natural Gas
• Silver
• Crude Oil

Open positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
12/29/08	Long	1	MAR 09	Corn	422 1/4	412	($512.50)
12/31/08	Long	1	MAR 09	Cotton	48.52	49.33	$405.00
01/06/09	Short	1	MAR 09	T-Note (10yr)	123-285	125-220	($1,796.88)
12/24/08	Long	1	MAR 09	Wheat	579 1/4	630	$2,537.50
01/06/09	Long	1	MAR 09	Wheat	627 3/4	630	$112.50
Net Profit/Loss On Open Positions							$745.63

Account Balances

Current Cash Balance	$47,783.90
Open Trade Equity	$745.63
Total Equity	$48,529.53
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$48,529.53

---------------------------------------------
Cashed out: $20,000.00
Total value: $68,529.53
Weekly return: -2.1%
2009 YTD return: -4.5%

2008 return: -8%

***"Cash out" mostly means taxes - lately we've also been using it for living expenses, and also to finance our time management software company that was recently covered by the Sacramento Business Journal and Inc magazine.

Commodity Futures Review - January 4, 2009

Now for the weekly review of our commodity futures positions - current as of January 4, 2009.

First, our top blog posts from the past week:

• Expert Commodity Picks for 2009: Jim Rogers and Marc Faber
• GoldMoney Review: Gold Climbs for 8th Straight Year
• Jim Rogers on Kudlow: We're going to have an inflationary nightmare

Our coverage of Marc Faber's recent interview on CNBC from December 1st continues to see a lot of traffic.

A review of our trades and positions from the previous week:

• Continued to hold one cocoa futures contract - down on the week, mostly due to a sharp Friday drop.

• Continued to hold one mini-gold futures contract. Gold was stuck in the mud for the week - though it did wrap up an 8th consecutive up year vs. the US dollar.

• Continued to hold one wheat futures contract - up a bit for the week. Looking to add on further strength.

• Bought one corn futures contract. This was an attempt to "pyramid" our grains position and diversify - in hindsight, looking at the charts of each, wheat looks stronger, and we should have added to that position before initiating this one.

• Bought one cotton futures contract - we LOVE cotton at these prices - as we've discussed with before in this space.

Commodities that appear quite beaten down - but we don't own them...yet...

• Sugar
• Coffee
• Natural Gas
• Silver
• Crude Oil

Open positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
12/29/08	Long	1	MAR 09	Corn	422 1/4	410	($612.50)
12/15/08	Long	1	MAR 09	Cocoa	2586	2506	($800.00)
12/31/08	Long	1	MAR 09	Cotton	48.52	48.90	$190.00
12/24/08	Long	1	MAR 09	Wheat	579 1/4	610	$1,537.50
12/15/08	Long	1	FEB 09	Mini Gold	836.6	877.3	$1,351.24
Net Profit/Loss On Open Positions							$1,666.24

Account Balances

Current Cash Balance	$47,887.81
Open Trade Equity	$1,666.24
Total Equity	$49,554.05
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$49,554.05

---------------------------------------------
Cashed out: $20,000.00
Total value: $69,554.05
Weekly return: -2.5% *** since 1/1/09
YTD return: -2.5%

2008 return: -8%

***"Cash out" mostly means taxes, but lately we've also been using it for living expenses, and also to finance a cool new time management software startup that is starting to lift off - and was recently covered by the Sacramento Business Journal.

Weekly Futures Positions Review - December 28, 2008

Top posts from the past week:

• Lean Hog Prices Poised to Climb in 2009
  
• Why eBay is the Best Indicator of Gold's Fair Value
  

Our coverage of Marc Faber's recent interview on CNBC from December 1st continues to see a lot of traffic.

A review of our trades and positions from the previous week:

• Continued to hold one cocoa futures contract - up slightly on the week. Looking to add to this position on higher high's.
  

• Continued to hold one mini-gold futures contract - a nice bounce on Friday for Gold also made this position a solid performer on the week. Looking to pyramid if/when gold makes a serious run at $1,000.
  

• Purchased one wheat futures contract. All of the grains look like they are now breaking out - the corn and soybean charts look very similar. I think the grains are seriously oversold, and the bullish fundamentals are quite intriguing at these price points. I prefer wheat and corn over soybeans personally from a fundamental perspective.

Our wish list...everything here looks beaten down...some starting to form a bottom it appears...

• Sugar
• Coffee
• Cotton
  
• Natural Gas
• Silver
• Crude Oil
• Corn

Open positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
12/15/08	Long	1	MAR 09	Cocoa	2586	2616	$300.00
12/24/08	Long	1	MAR 09	Wheat	579 1/4	599	$987.50
12/15/08	Long	1	FEB 09	Mini Gold	836.6	870.6	$1,128.80
Net Profit/Loss On Open Positions							$2,416.30

Account Balances

Current Cash Balance	$47,916.42
Open Trade Equity	$2,416.30
Total Equity	$50,332.72
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$50,332.72

Cashed out: $20,000.00
Total value: $70,332.72
Weekly return: 4.9%
YTD return: -8.6%

***"Cash out" mostly means taxes, but lately we've also been using it for living expenses, and also to finance a cool new time management software startup that is starting to lift off - and was recently covered by the Sacramento Business Journal.

Stratfor: Fall in Food Prices Likely Temporary

Stratfor reports that the current drop in food prices is likely to be temporary, because falling prices and the credit crunch will reduce supply next growing cycle.

The article confirms something we've been discussing here at length - the trends which originally brought about the supply/demand imbalance in the grains markets are still firmly in place, and that these supply constraints will remain until there is a large structural change in supply or productivity.

Food Supply Problem More Acute Than Ever

Chris Mayer writes in Agora Financial's Rude Awakening that the global food supply problem is more acute than ever before, as a result of the current financial crisis.

This is something we've been discussing here of late. Farmers cannot get basic loans for fertilizer. Forget about new capital investments. And this all happening with world inventories of the grains hovering near historic lows.

BOTTOM LINE: Pick up some agricultural commodities at these depressed prices. Ag-flation is coming - you may as well profit off it!

Weekly Positions Update - 6/15/08

Open Positions Date Position Qty Month/Yr Contract Strike Call/Put Entry Price Last Price Profit/Loss 06/12/08 Long 1 SEP 08 Corn 734 1/4 768 1/2 $1,712.50 05/08/08 Long 1 OCT 08 Live Cattle 105.350 109.950 $1,840.00 05/09/08 Long 1 OCT 08 Live Cattle 106.700 109.950 $1,300.00 06/11/08 Long 1 SEP 08 Wheat 867 3/4 907 1/2 $1,987.50 Net Profit/Loss On Open Positions: $6,840.00

Account Balances
Current Cash Balance	$85,793.95
Open Trade Equity	$6,840.00
Total Equity	$92,633.95
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$92,633.95

Cashed out: $15,000.00
Total value: $107,633.95

Weekly return: -0.9%
YTD return: 37.8%

***BTW, I usually "cash out" money just to pay for taxes, rent, and cheap beer. So total value is all pre-tax.

Runaway Grains, Never Coming Back

Looks like this corn crop is toast, and the other grains could be in trouble too. High input costs (diesel, fertilizer, etc) are really hammering farmers and their motivation to replant crops this late in the year.

I ponied up for a wheat and a corn contract last night. A little bummed I got into corn so late, but I got stopped out a month ago fair and square - it happens. All we can do is look ahead, and looking ahead now, the upside seems to far outweigh the downside. No telling how high the grains can go - we may be on the verge of a global famine.

Given this, as we've discussed before, meat prices must rise - no way around it! The cattle contracts look especially attractive. Both lean hogs and pork bellies already have premiums priced in for the distant contracts, but I'm not seeing that in the longer term cattle contracts.

Rude Awakening: "D" is for Demand

Great job by Dan Denning and the Rude Awakening crew on today's article.

They make the case that a steep decline in agriculture is unlikely. Only a decrease in demand would trigger that, and that does not appear likely at this point in time.

USDA Planting Intentions Report Released

3/31 Editor's note - Click here for coverage on the latest USDA Planting Intentions Report.

 

Report looks to be bullish for corn, bearish for what and beans. Full article from Farm Futures. And the markets are trading accordingly.

I just picked up a May corn contract at 576 - like the report, and overall strength the corn market has shown over the last several months.

Beans are really taking it on the chin, closing limit down.

DailyWealth: Brazil Key to Upcoming Food Crisis

Full article

Summary:

• UN says world food production must increase by 60% over next 20 years to meet demand
• Grain and meat production is extremely water intensive - many areas in the world do not have the excess water to ramp up grains and meats
• Brazil will be the key - it has 23% of the world's arable land, and 40% of it is currently unused
  

Kevin Kerr: Farmageddon

Full story

Summary:

• Kerr believes a sharp correction could arrive at anytime
• Corn prices are likely to remain high as long as the US gov't continues to subsidize ethanol
• Longer term, the bull market in ag commodities should continue for some time
  

USDA: Food Prices to Rise in 2008

Well...duh.

Full story

Summary:

• US retail prices in 2007 rose about 4% - highest gain in 17 years
• Similar gains expected for 2008
• Reduced production of meat and poultry expected in 2009 (our next investment theme, maybe?)
  

Potash CEO: Record Crops Needed to Avoid Famine

Full stories:

• Theglobeandmail.com
• Bloomberg

Summary:

• Potash CEO William Doyle says grain farmers need to harvest record crops every year to meet demand and avoid famine
• Potash execs are so confident in long term demand that they considered taking the company private in mid-January
• "We need a record crop in 2008 just to stay even with this very low inventory situation," Mr. Doyle said.

WSJ - Heartland Sees Boom With Grains In Demand

By JULIE JARGON

February 15, 2008; Page A1

ALBION, Neb. -- The U.S. economy may be teetering on the brink of recession. But there's a bountiful harvest down on the farm.

Grain prices are surging to historic levels. Spring wheat, a variety often used in bread, hit a record $18.53 per bushel yesterday. Corn is trading above $5 and soybeans are bringing in more than $13, all 25% or more above their year-ago prices.

Net farm income is expected to hit $92.3 billion in 2008 -- a 51% increase over the 10-year average of $61.1 billion. Across much of the Great Plains, unemployment rates are well below national figures and housing markets remain robust. Robert Moskow, a food industry analyst at Credit Suisse, has proclaimed this the "golden age" of agriculture.

Rest of article (subscription required)

Wheat Going Crazy - Trading Band Widened

From Agora's 5 Min Forecast:

Likewise, the wheat “trading band” has been widened this week for the first time in eight years. In response to upward pressure on wheat prices over the past year, U.S. commodity exchanges are allowing the wheat price to move a maximum 60 cents up or down each day, instead of 30 cents.

On cue, wheat soared nearly 60 cents in Chicago, to a new record high of $11.53. The price retreated quickly, back to $10.48 -- 45 cents below its opening price. Swings like this are likely to continue for some time.

“When you get a rally like we have seen in wheat,” explains Kevin Kerr, “the exchanges (and government) get nervous. So they take action. In this case, the limits on the wheat market were raised considerably, and in essence, that will raise margin requirements too, and force many individuals to liquidate. We are not seeing wheat back off too much yet, but it will almost certainly have an impact.

“This has been an incredible rally for the grains, but now is not the time to be overly bold. Now is the time to use caution. Changes like this can send a chill through the market and make traders nervous. This is one of those times to be defensive and secure profits until things get sorted out.”

Reuters-Jefferies CRB index hits all-time high

As stocks continue to flounder, commodities continue to soar across the board. Platinum has set 7 record highs in the last 8 trading days. All wheat contracts also set all-time highs.

No doubt this is a flat out bull market. But all bull markets have set backs, so we need to keep that in mind.

What are the best ways to trade this market:

• If you're a momentum/technical trader, you may be loving the action right now in the strongest performers. At the risk of sounding like your mother - have fun, but be careful! The volatility is really nuts right now, and that means prices can go down as well as up.
• If you're a longer term, fundamental trader (as I am) - take a look at the stuff that is still low, but starting to move up. I look at sugar, coffee, and cotton as great bargains right now.

We all know the long trend of these markets is up, but it's also imporant to manage risk and not get burned (too badly) if the markets swing back. There are a lot of long speculative positions in these markets right now, and a fast liquidation of these positions would send everything tumbling. We saw a dress rehearsal of this a few weeks ago when the global markets tanked.