Thursday, September 13, 2007

Bushels of Knowledge

Since I dove head-first into commodities about a month ago, I have learned tons - or should I say bushels?

Nothing sharpens your focus better than putting your money at stake.

For a while now I have been trying to teach myself about corn, soybeans, and orange juice and it took buying a basket to really light the fire in me.

Learning a new subject or taking up a new hobby can be very energizing. Now I have google email alerts pouring articles into my inbox on commodities. Most of it is crap but in the sifting I unearthed some great informational resources. In a matter of weeks I have become extremely fluent in at least the argot of commodity trading. The next step will of course be the ability to make money from my edification.

Do you know what "BPA" means?

It means "bushels per acre" - and I believe it is also referred to as grain yield. It's a pretty important metric for farmers and commodity investors. In fact, it might be THE most important datum in agriculture.

Sometimes farmers will reap 200 bushels of corn per acre, and sometimes they will only get 50 due to bad weather or pestilence. So their total deliverable corn can obviously vary by orders of magnitude. How would you like to run business knowing that your revenue could vary anywhere from say $100 million to $400 million? This is the life of a farmer.

Of course they have crop insurance (at a cost), pesticides, and irrigation systems. Still, the unknown variable of weather dominates.

They can have a great year of sunshine and rain and yet, an early frost can doom the crop. Gasoline can spike and they hemorrhage money with the machinery and logistics. So many things can go wrong and imperil the profitability of harvests.

Commodities provide a beautiful study of economics and risk taking. Why is wheat surging to new multi-year highs at the moment?

Well, look at how corn spiked in 2006.

Last year, farmers saw the spike in corn and rotated more acreage to planting it instead of other crops. So the supply of wheat went down this year - aggravating its price spike.

Now, with corn and wheat in the stratosphere, soybeans will be rotated away from and could spike next.

See what I mean about the economics lesson? This is the substitution effect in black and white. There are only so many acres of farmland and the acreage will always gravitate towards maximum profit.

Why did corn spike last year?

Of course, from ethanol gasoline mandates by your politicians. So despite their unremitting annoyance, you can make good money from global warming worrywarts. Last year I had the look to get long corn but deleted the email. Darn!

In fact, it can be argued that global warming alarmists have inflated the entire agricultural sector - as corn dragged up wheat which will drag up soybeans and cotton, etc.

By the way, sugar will eventually get a big, politically-driven push from ethanol mandates as well. And soybeans are used to make "biodiesel", another loopy, economically inefficient green fuel.

Meanwhile, the skyrocketing cost of corn tortillas is ravaging the poor of Mexico and no doubt sending more hombres north of the Rio Grande. But that's neither here nor there - for this post.

I found one great site that has comments directly from farmers. Reading them is very interesting as it almost puts you right in the fields. Here are some excerpts:

9/12 - Northeast Nebraska: Temperatures in the low 40s and some mid 30s this morning. Most beans still green. Corn has started to dent but is still has high moisture. Predictions for even lower
temperatures next week could bring fears of frost or freeze. Some dryland crops suffered during the late summer heat. Early September rains may help dryland beans but the rains were spotty.

9/12 - Western Minnesota: Corn and beans look to be average for this area. Early frost and excessive rain in June have caused more damage than the dryness so far. Very dry now, but still have chance for near normal yields with some good rains soon.

9/12 - Benton County, Indiana: Corn harvest underway, but just barely. Yields seem to be over achieving, considering minimal rain during growing season. A good friend of mine completed his first field where a 102 day hybrid, planted 4/10 went 203 bpa at about 16% moisture. These are good black soils so we'll see.

9/12 - Southwest Illinois, St. Clair County: Corn harvest is in full swing. I’d estimate 1/3 of the crop is off. The early planted corn has been pretty good. 110-140 in the lighter soils in the south to yields in the 160-190 range on the better soils in the north. Moistures are very dry with elevators reporting nothing coming in over 16% and most 12-14%. May planted corn is the 20% range and will come off soon. I suspect it will be 20-30 bushels less than the April plantings, if we are lucky. Corn quality is decent with test weights fair at 55-58lbs for the most part. This isn’t the crop we had our sights set on June first, but given the record August heat and lack of rain we have to be somewhat pleased that we will wind up with an average to slightly above average crop. The heavy rains this past week will help some beans, but it was 2-3 weeks too late. I think most 1st crop beans will be 30-40 bushel and double crops will run 10-20. Both about 15 bushel off the average. Lots of wheat seed bought and supplies are tight.

9/12 - Northeast Iowa: Yields are great here in northeast Iowa. Hopefully our new bin is up in time. Storage will be the problem here. Some yield checks were 230+ on corn & into the 60's on soybeans.

There really is so much going on with commodities. Remember, this ethanol mandate that has arguably driven the explosion in grains redounds fundamentally from the Morons we've elected, BUT derivatively, the focus on alternative energy stems from simply higher oil prices. Crude futures touched $80 a barrel yesterday, an all-time high.

It doesn't matter exactly why oil is rising; to make money all an investor/trader has to do is understand how high oil will manifest itself in other securities.

Expensive oil may be one catalyst behind the run in grains but it's likely that they were going up anyway. United States wheat supplies were at a 33 year low this year. As Jim Rogers has bleated, commodities go through long cycles of under-investment and over-investment. Nobody was planting wheat fields over the past decades - they have been putting condos and golf courses instead.

Granted, through the bounty of genetic engineering, crop yields have been rising for a very long time. Farmers get way more crop yield than they ever did before. Look at this nice ascending chart.

In fact, I saw a remark from a farmer lamenting about the weather along these lines, "Thank Monsanto for the weather-resistant seed.... Ten years ago, we wouldn't have even had a crop to harvest".

Therein lies the ultimate bear argument against commodities - technology.

Technological improvements in seeds, machinery, finance, drill bits, etc. have been THE most important factor in commodity prices over the long haul. But this doesn't mean there aren't tradable rallies and mini bull markets within this larger downtrend. At their nadir in the late 1990s, commodities across the board were effectively at Depression level prices.

Back to oil for one last comment.

Crude oil is used to make and do just about everything on the planet. What's astounding is how rarely this insight is to be found. Rising oil has raised the cost of almost everything under the sun from the cost of driving to the cost of electricity to the cost of glass. Miners have had their profits ravaged by higher energy costs. I priced out a new sunroom for a house we almost bought. The salesman told me that to defer the project was to flirt with higher prices as the large glass panels are produced by burning fossil fuels. Farmers are dealing with suddenly expensive fertilizer since it, too, is petroleum generated. So these higher commodity prices aren't yet translating into producer profits (outside of oil and maybe copper) yet. Mild profits cap supply increases and will keep this commodity bull running plently more.

Jim Rogers recently said,

"I think there will be fortunes made in agriculture in the next decade." (link)

He looks prescient already. I wouldn't bet against Rogers - after all, he made so much money that he retired back in 1980 at age 38.

I told y'all that you could bum a ride on my auto-didactic commodities tour so there will be plenty more posts on the stuff you casually stuff into your mouth and car without contemplation. In this post I endeavored to give a glimpse into the fascinating links persistetn in commodities markets. Any eager student of economics will appreciate this subject.

And, I didn't even get to the cattle market yet. Remember, livestock needs to be fattened on these skyrocketing grains.

So burgers will soon cost a little more thanks to your neighbor who frets about global warming.


Taylor Conant said...

Cool, interesting stuff, you seem to be learning a lot quick.

CaptiousNut said...

You should tone down the blogging and romance and dive in yourself!

Anonymous said...

I plan on taking a tour of the Minneapolis Grain Exchange when I get back home to Minnesota. Have been a big Rogers since Investment Biker but was always put off by the exorbitant expense ratio's and fees of commodity funds. I'll be interested to see if you post specifics about your investments in terms of specific contracts. On a side note: I was born and raised in NYC and now live in the Twin Cities and I can tell you , if someone wants an unattainable goal in life - just ty to find a farmer that is not whining about something. Too hot, too cold, not enough rain, too much rain etc...they make the union guys seem absolutely selfless. (The entire time living in some of the most beautiful land on the planet)!

Anonymous said...

From one who would have encouraged my husband to get a secure job in the Post Office, this occupation terrifies me !
(He ignored my advice )

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