Tuesday, June 5, 2018

Closing Market Analysis June 5, 2018 (Dec 18 Corn)

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. *****  

This makes the 5th day in a row December corn closed below the 20 day moving average. You might chalk most of this up to the uncertainty over trade talks (read Trump). I have a hunch that there is potential for recovery if this works out but others are having their doubts about when and how that might take place.

Fundamental analysis (trade wars aside) indicate solid support around $4 or higher, but if a trade war does unfold, we might adjust that lower on a fundamental basis. I think recovery (if there is no trade war) will be limited to the extent that corn demand is dampened as a result of the hit that livestock exports and demand for feed takes in all of this. Of course maybe China is leveraging Trump's rhetoric to drive down prices and then come in and buy up cheap grain. No trade war, and both Trump and China win. But that's a stretch.

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. *****  

Sunday, June 3, 2018

Flat Earth Certified Travel

From the New Yorker: Looking for Life on a Flat Earth

These people and the Non-GMO project folks really need to get together. Together they could spin a theory that global warming is impossible on a flat earth. Or have ‘Flat Earth Certified’ cruise ships that verify their course won’t go dropping off the edge of the planet. Even though there might be a scientific consensus that the earth is round, there are no independent scientific studies on what happens when actual cruise ships travel near the ‘ends’ of the earth. The precautionary principle would require cruise ships to stay closer to the shore until more studies are done. But the cruise companies probably would not be cooperative and conceal any findings or bias studies with funding. Consumers have a ‘right to know.’

Wednesday, April 25, 2018

December Corn Futures Technical Analysis (April 25, 2018)

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. *****  

Previously I covered a back of the envelope fundamental picture of the new crop corn market and basically concluded there was strong support around a $4.06 price and potential to go higher depending on final harvested acres and yield. By coincidence, December corn closed that same day around 4.06 and picked up another 6 cents as of this writing.

With the RSI below 70 there is indication that this isn't overbought and the MACD indicates the beginnings of a bullish crossover. Today's movement has been attributed by some to really dry conditions pressuring the Brazillian 2nd crop corn as well as reduction of Chinese tarriffs on grain sorghum.

(Chart and data produced via quantmod and quandl packages in R - See code below)

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. *****  

Tuesday, April 24, 2018

Back of Envelope 2018 Corn Balance Sheet and Price Scenarios

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. *****  

As planters start to break free of the ice I thought I would spend some time doing some quick and dirty speculating about what the balance sheet for the 2018-19 corn marketing year might look like. Below are projections based on historical data and the most recent prospective plantings report.  USDA will have its projections out in the next report on May 10.

Being adhoc I only projected off of the last three years of data for the key balance sheet items. The idea is to get a rough back of the envelope look at the implications of the major fundamental factors for the fall harvest and price environment using the projected stocks to use ratio.

U.S. Corn Balance Sheet 2018-19 
April 24,2018

Planted Acreage (million acres) 88
Harvested Acreage* 80.96
Yield (Bushels/Acre)* 173
Beginning Stocks (million bushels)* 1920
Total Production* 14006
Imports* 58
Total Supply 15984

Feed and Residual (million bushels)* 5377
Other Food, Seed, and Industrial 6844
Exports* 2039
Total Consumption 14260

Ending Stocks (million bushels): 1724
Ending Stocks/Total Consumption (%): 12.09%

*based on or derived from recent historical data - will update with better data when available

Given these assumptions, this is a pretty low stocks to use ratio relative to the last couple of years. This is assuming basically trendline yield and planting every acre as expected (which is already 2 million acres fewer than last year).

What are the major threats (bullish factors) at this point? With the historically cold april (the coldest April on record since the late 1800s) there is concern about the impact on yields. Mike Tannura  comments recently on AgWeb:

“You have to start at 1960 when analyzing the U.S. corn crop, because technology was so different prior to then that it’s hard to compare what yields might have done before 1960,” he explained. “Seven [of those 20 coldest Aprils have] occurred since 1960, and of those seven, six had below trend corn yields.”

Tannura was quick to point out that while April weather is typically not the driver of the U.S. corn crop, a cold April leads to later planting which does influence yield.

“Six out of seven times you can’t get back to trend line yields because of it,” he said.

I think it really depends on how late planting interacts with the possibility of heat stress this summer. However one thing we have seen is that with modern planters and GPS we can plant a lot of corn fast. If we get two good weeks the first or 2nd week of May in addition to modern genetics we could still get close to trendline yields unless we get some sever conditions. One thing though, is how much prep work (pre-plant herbicide and fertilizer applications) will get done properly prior to planting and how much of a rush to plant impacts this. Lets look at the impacts of some yield scenarios on implied prices (based on a basic historical regression of prices and stocks to use):

Yield Harvested Acres Stocks to Use Implied Price  Scenario
173            81                                     12.09        3.901        Average Yield Projection
175            81                                     13.32        3.778        Average Yield (2 years)
168            81                                        9.25        4.185        Lowest Yield  (3 years)

If we had significant yield reductions over last year, as low as 2015 levels, estimated stocks to use would be as low as levels seen in 2013 the first year after the 2012 drought.

However, maybe even more likely, if the cold April and late planting ultimately materializes in fewer planted or harvested acres we could see just as drastic of an impact on stocks to use.

Harvested Acreage Yield Stocks to Use  Implied Price
   81                                  173         12.09          3.901
   80                                  173         10.93          4.017
   79                                  173         9.86            4.124

What if we got a slight reduction in both yield and harvested acres?

Harvested Acreage Yield Stocks to Use Implied Price
   80                                  172                10.41           4.069

While this is very quick and dirty (its only based on 3 years of historical data from WASDE reports) its the dynamics (how much the needle moves on price with changes in yield and harvested acres) that are most interesting. This basic analysis definitely seems to provide some fundamental support for the $4.00 range of corn prices we have recently seen with the December 2018 corn contract.

Huge Caveats

So besides the crude estimates on limited data, there are some other factors to consider as well. My model relating stocks to use and price doesn't factor in a number of market factors that could bias these results. I could be underestimating price quite a bit in all of these scenarios. Also, there is a lot of talk from analysts about usage being high and rising. My average estimates on feed and residual use as well as exports could also be leading to higher levels of stock to use making my price projections too low. So in a sense, my projections while providing support for current price levels, could be relatively bearish compared to more realistic numbers. With additional updates and better projections from USDA in the coming weeks these biases should be addressed. Plus, I need to invest some time in more sophisticated price models besides the basic stocks to use regression on extremely short time horizons.

(at the time of writing December 18 corn futures was at $4.0650/bu.)

Additional Readings and References:

Weekly Outlook: Is Corn Setting Up for a Rally?

How Many Days Does It Take to Plant the U.S. Corn Crop?

This Historically Cold April Might Mean Lower Yields

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. *****  

Sunday, April 15, 2018

Who says U.S. farmers aren't feeding the world?

There have been some to push back regarding the notion that U.S. farmers 'feed the world.'  However, this adds some perspective for consideration:

“Syngenta (2014) reported that the demand for grain has increased almost 90% since 1980 and that each year 2.4 billion tons of grain is consumed annually through food, fuel and feed. The four main contributing crops include soybean and maize (feed), and rice and wheat (food). In South Africa, half of the maize produced is used for animal feed, of which 70% is for poultry (Goldblatt, 2012). Furthermore, any significant rise in the demand for meat results in a similar rise in the demand for grain because one kilogram beef requires seven kilograms grain to produce, one kilogram pork requires four kilograms of grain and a kilogram of poultry requires two kilograms of grain (Syngenta, 2014). It is thus evident that agriculture is mainly demand driven and the grain industry specifically will continue to play a vital role in the global economy. The challenge will be to meet the growing demand by means of increased production.”

from: A COMPETENCY MODEL FOR DATA SCIENTISTS IN GRAIN SA YOLANDI KRUGER Field study submitted to the UFS Business School in the Faculty of Economic and Management Sciences in partial fulfilment of the requirements for the degree of MAGISTER in BUSINESS ADMINISTRATION at the University of the Free State Supervisor: Prof. M. KotzĂ© Co-supervisor: Mr J.F. de Villiers (2015)

Thursday, February 22, 2018

From the tweet stream February 22, 2018

From my economic sense blog post - The 'free-from' Nash equilibrium food marketing strategy.

A meta analysis summarizing 21 years of research related to GMO corn. Results - healthier and better yielding. 

"Results provided strong evidence that GE maize performed better than its near isogenic line: grain yield was 5.6 to 24.5% higher with lower concentrations of mycotoxins (−28.8%), fumonisin (−30.6%) and thricotecens (−36.5%)....The results support the cultivation of GE maize, mainly due to enhanced grain quality and reduction of human exposure to mycotoxins."

Beyond proof of concept - blockchain

“Before the blockchain test, it took Walmart six days, 18 hours and 26 minutes to trace the mangoes back to their original source, he said. Blockchain not only cut that time down to an unbelievable 2.2 seconds” - from https://progressivegrocer.com/grocers-embrace-blockchain-new-era-transparency 

Corn may soon be fixing its own nitrogen:

"Pivot Bio is on a mission to replace all nitrogen fertilizer with microbes that adhere to the crop’s root system and spoon-feed the crop each day. These microbes mature as the crop grows, matching the supply of nitrogen to the need of each plant."  https://medium.com/@ktemme/the-crop-microbiome-holds-the-future-of-fertilizer-68ce67d07ad 

Facial recognition for managing cattle.

If you think that is cool, check out  Image-based ex-vivo drug screening for patients.

Some research on gene drives.

Follow me at @AgEconomist 

Friday, February 2, 2018

What if they made a movie about Elinor Ostrom?


Governing the Commons: The Evolution of Institutions for Collective Action. By Elinor Ostrom (HT: Cafe Hyek, Don Boudreaux)

"Predictions that individuals will not devise, precommit to, and monitor their own rules to change the structure of interdependent situations so as to obtain joint benefits are not consistent with evidence that some individuals have overcome these problems, although others have not."

i.e. sometimes people devise cooperative ways to escape from a Nash Equilibrium without resorting to taxes or regulation.

In the movie A Beautiful Mind, there is a scene where John Nash states "Smith was wrong." I wonder if they made a movie about Elinor Ostrom if there would be a scene where she could say "Nash was wrong."  Of course both statements are just terse jabs failing to capture the actual subtleties and nuances of economic theory.