Junkbox, Episode 2L8...  

The rains we needed badly a few weeks ago continue to drizzle our harvest to a halt - especially soybeans. Talk about tough cutting! Between the greens stems and pods and sticky topsoil, nothing seems to work well. Yields have been in the 40's - too bad we didn't know that when they were paying $18+.  I think we'll get another chance.

We are soooo celebrating the Last Row this year.

Meanwhile, under the category of "I had to ask", my daughter-in-law responded to my query for ideas for something I could make in my shop for them with this:

What I am learning is to keep the rustic, authentic character of reclaimed timbers, barn wood, etc. you have to work with slightly skewed, never square, almost flat lumber. I'm using Neanderthal chisels and handsaws to cut joints to fit. Worse still, I'm really loving it!

But it does take time compared to the collective 185 HP of power tools that are watching enviously.

• Peak Rice? (I'd take it more seriously if it wasn't Lester "Forever Famine" Brown.)
• I hope GMO advocates have a plan B, because they are very probably going to lose. (See my commentary on USFR this week for more.) I don't think they understand it doesn't matter if you are right anymore.
• Maybe it's because all the farm lobbies have moved offices to the capital.
• The last below-average monthly global temperature was 1985.
• The crops are disappearing but the drought is still going strong.
• Don't upgrade to iOS 6 if you use Google Maps. Seriously.
• Gosh - we didn't see this coming...

 Remember, it only takes one old nail to ruin a $45 bandsaw blade. Actually, the other part of the nail can ruin a second one, too.

Another...

Great economics video.  Note the whacking size of "System D".



It is from this economy, I think, that much of our problematic savings glut is emerging. Because we don't see it, we can't grasp the amount of wealth it is creating.

On the whole, I find this very encouraging news about the global economy.

Little cheaters...  

Dan Ariely, whom I have quoted often, offers some wonderful insight into dishonesty.



(I have been mildly opposed on constitutional grounds to the display of the Ten Commandments in schools, but perhaps should rethink it.  At the same time, I would also support other moral statements from other religious, philosophical, etc. sources.)

I also can't help but wonder what in our agricultural system is inadvertently influencing people to cheat. What could we change to raise our moral performance?

Certainly, technological advances like ACR (automatic crop reporting) would reduce the opportunities to defraud, I would think. Of course, grain sales 1099's would do likewise.

Trust me...  

You can because you can't see me. Here's how we decide if someone is trustworthy:

To find out what cues the players were responding to, the researchers filmed the students’ five-minute conversations before the game started. They discovered that four specific gestures predicted when a person was less trustworthy: leaning away from someone; crossing arms in a blocking fashion; touching, rubbing or grasping hands together; and touching oneself on the face, abdomen or elsewhere. These cues were not predictive by themselves; they predicted untrustworthiness only in combination. [More]

Therefore I should tell you I'm not doing any of those things.

(I'm scratching something.)

Chinese CAFO's...  

As despised and frankly unappealing as CAFO"s are, they still are the best current method to produce a lot of pork. In a country where it may be easier to slide around environmental restrictions, they would be a real protein efficiency boost.

And that's what China seems to be doing.

In the long run, China’s move from backyard pigpens to huge industrial farms like Jiahua Pig Breeding, which benefit from economies of scale and more stable production plans, could help calm volatile boom-bust pork cycles and bring inflation more under control.

“The faster the trend to scale up and the faster that backyard breeding is phased out, the more volatility will be dampened,” Hua Jianqing, Jiahua’s president and principle investor, said from his headquarters in rural Zhejiang, south of Shanghai.

“It won’t be a year or two,” he said. “My analysis is that it will take three to five years to reach the balancing point.”

Jiahua keeps 5,000 breeding sows at a time and raises 100,000 pigs a year.

Squirming and oinking, young sows are lined up daily for buyers peering through a glass window. Those that are picked can be shipped hundreds of kilometers to help seed yet another huge farm. Large-scale operations with about 3,000 pigs each now account for about 20 percent of China’s herd, but huge, American-style farms of Jiahua’s size account for only about 2 percent.

The record-high margins last summer created a classic boom in investment in pigs, but now a drought in the United States is pushing up the price of grain used for feed, prompting owners of small farms to slaughter their animals and setting the stage for a possible supply shortage in months to come.

Small farms still produce enough hogs — about one-third of the national herd — that their decisions to buy more piglets or sit out a season can have a big influence on prices.

“If fewer choose to raise, in the third quarter of 2013 we see a shortage of pork and a run-up in prices,” said Andy Rothman, China strategist for the brokerage firm CLSA in Shanghai. [More]

It also suggests their appetite for corn will be a little more resilient to high prices, just as our big operators have proven to be remarkably tough during this current runup in prices.

In case things are going too well for you...  

A possible headache on the horizon.

Farmers across the Northwest and Midwest are watching nervously as longshoremen and grain terminal operators start negotiations with far higher stakes than in the disputes that caused chaos at the Port of Portland this summer.

The disputes diverted ships and clogged cargo as far away as Idaho and India but affected a relatively small container port. The grain talks involve a couple of Puget Sound terminals and, most importantly, operations on the Columbia River, which is the nation's top wheat export outlet.

If the talks fail to replace a contract expiring Sept. 30, wheat, corn and soybeans would back up across the U.S. grain belt, affecting billions of dollars in exports and tens of thousands of jobs.

No one predicts failure. But the negotiators, who occupy the narrow end of a gigantic U.S. grain funnel, face unprecedented pressure.  
...
Mike Steenhoek, executive director of the Soy Transportation Coalition, an Iowa-based soybean industry group, said a shipping stoppage caused by any problems with the longshore grain negotiations would hurt the Midwest economy. But he also noted that a threatened strike by Atlantic and Gulf Coast longshoremen, who also coincidentally face a Sept. 30 negotiating deadline, would hurt the national economy.

Such a stoppage by the International Longshoremen's Association, halting container movement at 36 ports from Maine to Texas, would dwarf the Portland, Longview and Columbia River/Puget Sound situations. Shippers would shunt cargo through West Coast ports, unless Pacific Coast longshoremen refused to handle it in solidarity with their East Coast counterparts. [More]

Longshoremen strikes are something we normally associate with Argentina, and I am not predicting one here. But It is a real blast from the past to ponder the effect of a strike.

Suppose China decided to _____...  

Fill in the blank. An enormous number of people with a tenuous grasp of macroeconomics and less understanding of foreign policy are lobbing out bizarre scenarios that in truth simply arise from blatant xenophobic "Yellow Peril" panic.

One of my favorites is: CHINA"S GOING TO CALL IN OUR LOANS!!! (I use all caps because that seems to be the standard format).

And, um, how would they do that, zactly? Let's check in with someone who actually studies these things.

No.  No, no, no, no, no, and no. 

To elaborate a bit further:  

First, it wouldn't be enough for China to stop buying Treasuries -- as Joe Weisenthal showed with some fun charts a few weeks ago, China has pared back its Treasury purchases intermittently over the past few years -- with zero appreciable effect on U.S. interest rates. (see non-panda-hugger Paul Krugman on this point as well).  No, for China to have the effect that Friedman envisions, they would also have to actively dump most of their holdings of U.S. debt as well.

So what if they do?  Well, second, while Romney's stated China policies border on the destructive, the "labeling" move is bone-headed rather than truly calamitous. China wouldn't dump its debt unless things got really bad between the two countries.  Not even Stephen Roach thinks this would be the initial Chinese response -- and I think Roach is being way too gloomy about Sino-American relations under Romney. 

The reason China won't respond with the nuclear option of dumping all its U.S. debt holdings is that -- to repeat a theme -- this move would hurt China way more than it would hurt the United States.  The far more likely response by China would be to retaliate with trade measures.  This would not be good, as China is now the third largest export market for the United States.  Beijing can hurt a Romney administration by reducing its American imports far more adroitly than trying to trigger another financial crisis. 

Now, for the record, I don't think Romney should label China as a currency manipulator on day one, and I think Friedman makes some trenchant observations on Romney's consequences-free foreign policy statements later in his column.  But this Niall Ferguson-lite version of Sino-American relations is bad international relations theory and really bad economics -- and yet Very Serious People keep trotting it out.  

I really, really wish this would disappear from public discourse.  But it won't.  So, most likely, my desk is gonna get dented a few more times before Election Day. [More]

Thinking about it, this is very similar to the worry that Arabs were buying up all the good property in the US back during the 80's (?) or some such time. I never could figure out why that was a big deal. It's not like they could take a skyscraper back home. 

What I keep coming back to how hard it is to comprehend the glut of wealth in the world. It has to be somewhere, and if not in relatively high-quality sovereign debt it would be "bubblizing" other assets even more than currently is the case.

While I agree we need to address our fiscal policy and move toward a sustainable debt level, the current simplistic view of debt as anathema or a weakness to be exploited by China is unhelpful and inaccurate. We need to fear the effects of enormous and concentrated wealth more.

Junkbox, Episode ACME...  

Jeez - the ethanol mandate debate seems to be getting pretty intense. And international. I'll post more this weekend since we're about to be drenched.

•  Bring back Harvest Gold!
• Insert your answer here. The correct response for grain farmers is "yes", BTW.
• The Man on corn acreage
• The other ethanol market is doing well, too.
• Inequality and common sense
• Evolution's welcome crisis

Drenching over - 2.2".  But no wind, thankfully.

Aflatoxin update...  

Ken Harrison e-mailed this regarding the aflatoxin remark I touched on yesterday.

I noticed the Aflatoxin wars in Illinois growing more heated as the grain merchants/processors are in conflict with the farmer and then the crop insurance/taxpayer has another view.  I thought the following was interesting as a work around.  Not sure it solves the variability of the test but it does resolve some conflict.  The consumer deserves a food policy that provides abundant safe food. 

Here is link to article about how TX jointly solved aflatoxin issues/conflict between processor, insurance and farmer. 

Here is excerpt from the article: 

“The solution is the One Sample Strategy, a voluntary aflatoxin risk management program administered by the Office of the Texas State Chemist and approved by RMA,” Herrman said. “The program provides a mechanism to standardize sampling and testing equipment and methods to achieve less variable results.”

Participating grain elevator employees are trained and approved as Office of the State Chemist designees to perform standardized sampling and testing procedures defined by USDA and the Office of the Texas State Chemist. Testing accuracy is maintained through monitoring and program oversight by state chemist field investigators.

“The official test results are reported by the OTSC designees, issued by the elevator on an OTSC Certificate of Analysis and shared with RMA,” Herrman said. “One sample is taken from a truckload of corn and used by all stakeholders to inform purchasing, insurance and regulatory risk management decisions.”

From the perspective of producers and insurers, Jones said, it has standardized the testing process and helped reduce uncertainty.”

He said the time invested in testing pays off when a reliable test result is used to determine the true quality of the corn for sale. This allows a faster and more accurate assessment of lost revenue is readily available for crop insurance claims. Ultimately, the program creates a fair playing field for producers and elevators.

“Everyone’s corn can be tested the same way and we can all do a better job of protecting consumers and the health of the Texas grain industry,” Herrman said.

To find a participating elevator in your area or learn more about becoming approved for the program, visit the One Sample Strategy Web site at http://otscweb.tamu.edu/risk/OneSample.

More news from: Texas A&M University

Website: http://www.tamu.edu

Unfortunately, this strikes me as excellent help for our next major drought.

What if...  

North Korea's newest "great leader" is NOT a total doofus?

Those measures, according to the reports, reduce the size of cooperative farm units from between 10 and 25 farmers to between four and six. The decrease is critical because it allows one or two households, not entire communities, to plan and tend to their own farms. Farmers still must hit production quotas, but they can keep 30 percent of their crops, up from less than 10 percent. They can sell the rest to the government at market prices, not state-fixed prices, and they can keep (and sell privately) anything exceeding the quota.
The changes do not apply to the entire country; they have been introduced in three rural provinces and took effect in July, according to reports. The changes could not be independently verified because North Korea maintains strict controls on foreign visitors, allowing few to visit poor areas outside the capital, Pyongyang.

North Korea is on a push to develop a long-standing special economic zone in its far northeast, hoping to attract business from China and Russia.

It remains unclear what is driving the government to allow farmers more personal control. The North could be trying to wring more production from its farmers “out of necessity, not out of virtue,” because its centrally planned rationing system is broken, said Victor Cha, a former White House director of Asian affairs. If and when the North’s food shortages ease, he said, the country is likely to retreat.
“Having said that, the more time they have to do this and let the economy function on its own, the better off we all are,” Cha said. “You can say to farmers, ‘Okay, for six months, you can keep 30 percent,’ but the more times you do this, the harder it will be to pull back.” [More]

All I know is we couldn't imagine change in Egypt or Libya, or even China a few years ago, so why not keep an open mind? 

I believe it will start with agriculture.

Stray thoughts on harvest...  

Just some stuff wandering through my mind.

• This will be the first crop claim ever for many farmers. I wonder how they will rate the experience and the discovery of what they actually get. Both could be real opportunities for disillusionment if not handled well. Could crop insurance come out of this with less support than before?
•  There is a sad trend here of corn fields continuing to degrade. Lodging seems to happen overnight and the ugly brown color is stomach churning.  Also, enough early reports have pretty well dashed hopes for a miracle. The more leaves drop the more obvious the absence of ears. Some of which are on the ground.
• Please read and heed Dan's warning about the Black Dust. DAMHIKT.
• Crop estimates are heading lower. This tends to agree with central IL experience, but your results may vary, of course. Early fields/short season hybrids were likely the best. By far.
• India may be the forgotten drought story:

  Some scientists warn that such calamities are part of a trend that is likely to intensify in the coming decades because of climate changes caused by the human release of greenhouse gases. A paper published last month blamed global warming for a large increase in the percentage of the planet affected by extreme summer heat in the last several decades. And the World Meteorological Organization, a division of the United Nations, recently warned that climate change was “projected to increase the frequency, intensity and duration of droughts, with impacts on many sectors, in particular food, water and energy.”

  Scientists say that in addition to increasing temperatures, climate change appears to be making India and its neighbors Pakistan, Sri Lanka and Bangladesh more vulnerable to erratic monsoons.

  Studies using 130 years of data show big changes in rainfall in recent decades, said B. N. Goswami, director of the Indian Institute of Tropical Meteorology, a government-backed research organization. Climate models suggest that while overall rainfall should increase in the coming decades, the region can expect longer dry spells and more intense downpours — forces that would seem to cancel each other out but in fact pose new threats.

  “Heavy rains are normally short duration, and therefore the water runs off,” said Dr. Goswami, who added that more research was needed to fully understand the impact of climate change on monsoons. “Weak rains are important for recharging groundwater.”[More]

•  No quick economic turnaround. Or it could be soon. Make your plans accordingly. FWIW, I think a slow slog between 2-3% GDP for a decade or more will look like a win.
• Soybeans could be better than we currently think around here. Partly this is due to the extreme pessimism from our corn harvest, and partly due to rain on 1 August on fields on heavy black ground that had at least not aborted all pods. Could be some fields in the 50's.  (Or I may be trying to Find the Proverbial Pony)
• I suspect there will be a protracted emotional funk after this harvest. There is always some letdown/collapse, but this one could leave us drained. In fact, by the time the election is over, many of us could mentally check out for a few weeks.
• Remember Clarke's Law: Any sufficiently advanced technology is indistinguishable from magic. Recall Gray's Corollary: Any sufficiently advanced incompetence is indistinguishable from malice. Now read this following post from Kevin Van Trump's morning newsletter (which I find remarkably valuable):

Central Illinois - Elevator tested Aflatoxin at 67, docked me $1.50 a bushel to unload. They saved me a sample and I paid the insurance company the $30 lab fee to test the same sample. It came back a 5. Insurance company says nope, not enough to pay, nothing we can do. Elevator saying-our test is accurate-nothing we can do. Can you drop Aflatoxin coverage from your policy for a cheaper rate? LOL! In their defense, there is still corn standing in that field-and insurance company coming out tomorrow to pull another sample from field. But only about 20% of our loads showing any-and only a couple with levels enough to dock-which tells me it is scattered around the field. So probably not a great chance they will find it in the field-or at least enough to pay on. I bet the elevator just blended it in and took the $1.50 as profit; it doesn't give me much confidence in the validity of Aflatoxin tests. I find it hard to believe that the sample tests are 13 X higher at one place than at the other. I had one guy tell me that they have heard of drying down to 13% with high heat then letting it cool and taking it in and it has been passing. I understand the elevator is in a tight spot with their customers but without a test that is even remotely accurate, I think it is just easiest to stick it on the farmer. Insurance sees it the same way I do. To fight against this, I am going to use a grain cleaner to screen off the cracked and broken kernels as they exhibit the most infection, put it in bins until the first good freeze, or dry it down with air. I just hope it's not just a gimmick to make money on high prices.

 The natives are restless.

HAL trades commodities...  

Consider this unsettling sentence from a recent research paper on algorithmic (algo) trading:

As we have seen, HFT algos can easily detect when there is a human in the trading room, and take advantage.  [More]

The astonishing takeover of all kinds of trading by "black boxes"should be a warning note for farmers who think their markets will not be affected. Quite literally, algo trading changes everything about any public exchange.

A third of all European Union and United States stock trades in 2006 were driven by automatic programs, or algorithms, according to Boston-based financial services industry research and consulting firm Aite Group.^[4] As of 2009, HFT firms account for 73% of all US equity trading volume.^[5] [More]

While the focus of black box trading has been speed which allows High Frequency Trading [HFT], it seems that is now reaching the point of diminishing returns, although it has upped volume magnificently. as for the big benefit - lower costs per trade - that may have bottomed out.

The advantages of the nation’s increasingly high-speed stock market are under the microscope after a number of recent trading malfunctions underscored the risks and instability that have come with the rapid changes. This month, one of Wall Street’s most important trading firms, Knight Capital, lost $440 million in 45 minutes after installing faulty software designed to keep up with an evolving market.

As the battle to introduce more sophisticated technology continues, raising the specter of more problems like Knight’s, the diminishing returns flowing back to investors are making even longtime proponents of innovation question whether the competition to make the market faster and more efficient is now doing more harm than good.

“They’ve reached the point where the competition is measured in microseconds and there are essentially no benefits to the public at that level,” said Lawrence E. Harris, the former chief economist at the Securities and Exchange Commission, and now a professor at the University of Southern California.

High-speed trading firms have thrived in the computerized markets and now account for more than half of all stock trading, up from 26 percent in 2006, according to the Tabb Group, a financial markets research firm. But even many of them acknowledge that they are engaged in an arms race that is delivering diminishing returns.

Manoj Narang, the founder of Tradeworx, said that the competition had become “a tax” on computerized trading firms like his. Mr. Narang says he thinks that his competitors are dedicating fewer resources to the race as they see there is little more to be gained. [More]

 While reversing this trend doesn't seem to be possible, more than few knowledgeable observers are wondering if we aren't stacking dynamite for a major market demolition.

First, let’s be clear about what these charts are showing. HFT is maybe a bit misnamed, since what we’re seeing here is two separate eras. From 2000 to 2006, trading got faster and cheaper. From 2007 to date, trading itself hasn’t actually risen much, or got faster. the huge spikes are in quotes, rather than trades, and it’s not uncommon for certain stocks to see more than a million quotes over the course of a single day, even when they are only traded a couple of dozen times.
You know the track cycling at the Olympics, where the beginning of the race is entirely tactical, and the trick is not to go fast but to actually position yourself behind the other person? HFT is a bit like that: the algorithms are constantly putting up quotes and then pulling them down again, in the knowledge that there’s very little chance they will be hit and traded on. The quotes aren’t genuine attempts to trade: instead, they’re an attempt to distract the rest of the market while the algo quietly trades elsewhere.
As such, the vast number of quotes in the market is not a genuine sign of liquidity, since there really isn’t money to back them all up. Instead, it’s just noise. But don’t take my word for it. Here’s Larry Tabb, the CEO of Tabb Group, and a man who knows vastly more about HFT than just about anybody else:

Given the events of the past six months, the SEC should think hard about the market structure it has created, and do its utmost to rein it in. While the SEC can’t stop computers from getting faster, there is no reason it can’t reduce price and venue fragmentation, which should slow the market down, reduce message traffic and lower technology burdens.
Until we can safely manage complex and massive message streams in microseconds, fragmentation is making one of the greatest financial markets of all time about as stable as a McLaren with its RPMs buried in the red.

HFT causes stock-market instability, and stock-market instability is a major systemic risk. No one’s benefitting from the fact that the entire market could blow up at any second. So why isn’t anybody putting a stop to it? [More]

But what about our tiny (relatively) commodity markets? Can't we buy a few puts or calls and live to tell the story?

The big increase in HFT-related trades has been well documented (though exchanges have been reluctant to break out the rising share of HFT trades for fear of inflaming demands for a clampdown). It has contributed to a surge in the number of trades in NYMEX crude from under 1 million in 2005 to almost 42 million in 2011, and in CBOT corn from 133,000 to 10.7 million, as well as a reduction in average trade size.

It is a truism to say that correlation is not the same as causation. But nothing worthwhile in social science has ever been proved conclusively to this standard. Bicchetti and Maystre do present some convincing arguments for a possible link, though, including the presence of statistical arbitrage programmes operating across multiple markets, and invite further work to establish its extent and the mechanisms.

The authors touch on an even more sensitive area when they speculate about whether HFT programmes import non-fundamental influences onto specific commodity prices.

The paper points out "(conventional explanations) fail to explain how economic fundamentals or the risk appetite of financial investors changed quickly. Indeed, news frequencies or human investors reaction is certainly not as high as 1-second."

Later the authors go on to argue "the strong correlations between different commodities and the S&P 500 at very high frequency are really unlikely to reflect economic fundamentals since these indicators do not vary at such speed."

In other words, HFT traders translate volatility from one commodity or financial market to another at timescales from seconds to minutes by arbitraging them very rapidly.

In a more serious charge, the authors suggest a lot of HFT programmes have feedback characteristics that tend to be self-reinforcing. "Although individually rational, the overall effect of trend following strategies may destabilise markets". Bicchetti and Maystre cite the "flash crashes" in equities (May 2010) and oil (May 2011) as examples of destabilisation.

The potential combination of HFT enforcing tighter correlations, and perhaps also propagating volatility within individual markets through herding behaviour, leads the authors to conclude that "as commodity markets become financialised, they are more prone to external destabilising effects". [More]

The warning here is clear. Our markets can bumble along in what we consider to be a normal market only to be be overwhelmed by spillover from who-know-what financial exchange and Very Big Money. This will happen between breaths.

My takeaway from this research is this. I want Cargill or Ingredion* between me and HAL. And any banker who funds a commodity trading account is asking for trouble. After all, they can tell I'm merely human.

*Yes - the first major grain buyer with "greedy" in the middle of their name! What committee okayed that one?

Sunday's Junkbox, Episode ISAAC...  

This is getting to be my Sunday morning habit after reading Dilbert. BTW, our "heavy rains" are up to a whopping 0.7".

• Real interest rates are already negative. What if nominal rates go seriously negative? Not impossible, it seems. Currency will be king!
• Harvest price option gets deserved scrutiny as a subsidized windfall. (For those with yields above 70% trendline)
• Nobody's replicating and hence not enough de-discovery
• Now meteorologists are on board with climatologists.
• Slaughter comes out of the closet. About time.
• Global farmland price trends