The Crop Report Said Yields Lower Than Expected
Was it the weather? Probably… And all the work I’ve done here on the temperature series and the long term climate cycles argue for these lower yields to be a tradable feature for some years to come.
OK, today we had a crop report that showed lower than expected harvests in corn, soybeans. This caught many professional traders off guard, and prices spiked. One floor broker said that, given the small number of contracts traded before they halted trading ‘limit up’, he expects this trade has more room to run. So do I.
DBA - Agriculture Basket TSN - Tyson Foods - Chickens CALM - Cal-Main - Eggs SAFM - Sanderson Farms - Chickens MON - Monsanto - seeds and fertilizers MOS - Mosaic - fertilizers IPI - Intripid Potash - fertilizer JJG - Grain ETF AGU - Agrium - fertilizers DE - John Deer - tractors
A beautiful example of a natural hedge. Today it was announced that crop yields are way off from expectations. Grains (DBA / JJG) both rose fast. Over 10% for JJG. At the same time, folks who buy grains, like the chicken and egg growers, plunged.
The expectation that farmers would be getting great prices, so would buy new equipment, and that the yield being down means more fertilizers and better seeds (and the cash to buy them in the hands of farmers) sent the ‘inputs’ makers up too.
Commodities often trade with “limits”. They can only move so far in a day before trading is halted. We were hard limit up on not many contracts. The grain price rises have more to go.
I’d also expect that the folks who turn grains into meat will continue to have issues.
Here is a live 10 day hourly trading chart and a 1 year daily chart for longer term holdings. The 10 day chart has the same stocks as the above chart, the 1 year chart has a different set.
The One Year Daily chart. I’ve added SFD SmithField Hams a hog farmer (which plunged 6.73% today)
SFD - SmithField Hams SAFM - Sanderson Farms - Chickens Jo - Coffee ETF SGG - Sugar ETF BAL - Cotton ETF DBA - Ag Commodity ETF NIB - Cocoa ETF
So it looks like time to swap from Latte to Mocha or hot chocolate… Only cocoa is dropping.
The Fed has announced they want inflation, probably a lot of it. At least 2% and maybe 3%. Couple that with a low crop yield, and commodities are all running higher. (I’ve added some precious metals positions today including some Platinum, that is lagging silver and gold right now, so lets me enter the trade ‘late’ with some insurance. It ought to catch up as industrial demands rise, and has less risk of a ‘plunge’ from folks leaving the gold trade. PPLT is a physical metal ETF.)
A few years back, when home prices were reaching unattainable levels and oil was blowing up to $120/bbl, we were told that there was no inflation as we were not making any more money to pay those bills.
Now we are being told there is no inflation at present because those same home prices are dropping. Never mind that the Chinese Yuan has appreciated against the dollar, so just about every manufactured good is going up in price as they are all pretty much made in China… but also we are to ignore that rubber prices are up (so tires have risen) and now all the “soft commodities” are going to make food and clothing costs rise.
When do we get to the part where wages inflate?…
OK, I’ve got a mortgage, so inflation is reducing it’s cost apace with reducing my cash holdings value (another natural hedge…) so I’m not losing net. But I still don’t like this “Heads we win, tails you lose” on the inflation statistics parts…
Despite the chart (that looks extended) I’m buying the commodities run ( I started with some metals and I’ll be adding “softs” Monday or Tuesday, among others.) To buy an extended run, you ‘scale in’ a little at a time (so an immediate reversal does not cause much loss) and over time add stop loss orders behind the positions (so a reversal doesn’t get much time to work against you and consume the smaller later gains of a late entry.) Basically, more paranoia about a possible big reversal, and more behaviours defending against it. But Fed action and economic recovery will be a several year story. There is a lot of time for an inflation trade to run. So…
I expect that this crop trend will continue for a long while, too. Solar output is down and it’s getting colder and wetter year over year. Plants produce less with less warmth and sunshine. So we can expect less production, higher prices, and money that is worth less (with stuff worth more).
Capital stock and land tend to increase in value with inflation, as does the stock of companies with durable competitive advantage as they can raise prices. That will likely be my central thesis going forward.
Then there is the “pin action” as those winner companies buy things. So farmers with higher prices for their grain (the ones who have grain to sell…) will be out buying new equipment, while their neighbors will be looking to more fertilizer and better seeds to get them back into high yield country.
Expect higher food prices to crimp the style of restaurants, but especially those with poor pricing power, as the consumer stays home more and goes out less. Avoid the folks who must buy those higher priced commodities but can not pass on the cost.
And as a global economic recovery gets going, expect metals and oils to rise first. As China continues to “win”, expect them to buy more expensive foods and more food. This will continue to push ag up over the years. So forget GM, it’s John Deere that will sell equipment.