John's World

2008-05-13T19:40:00.000-06:00

Pull my finger...

I know this is probably morally wrong, bordering on bullying, and insensitive... but...at least no carbon was released.

[via RGS]

2008-05-13T15:13:00.003-06:00

While we were watching corn prices...

The Fed did something astonishing. While we noticed, we didn't really see what it meant.

In December, the Fed had $775 worth of Treasury securities. That stock will soon have dwindled to $300B, give or take. The difference, about $475B, represents an investment by the central bank in risky assets of the US financial sector.

$475B is an extraordinary sum of money. It is as if the Fed borrowed more than $1500 from every man, woman, and child in the United States, and invested that money on our behalf in Wall Street banks that private financiers were afraid to touch. For bearing all this risk, if things work out well, taxpayers will earn about what they would have earned investing in safe government bonds. If things don't work out well, the scale of the losses is hard to predict. The Fed will claim to have done "due diligence" on its loans, to have valued collateral conservatively, and will point to strength of bank guarantees and the enormous diversity of collateral assets to convince us that its actions are safe and prudent. But rating agencies made the same claims about AAA CDO tranches, and turned out to have been mistaken. Correlations often tend towards one when asset values fall sharply. Central bankers struggling to manage day-to-day crises in financial markets might cut corners when trying to value complex securities. They might find it convenient to err on the side of optimism, as the ratings agencies did, albeit for very different reasons. And even if the Fed is cautious and sober-minded, are we sure that central bankers can value these assets more accurately than private investors?

If the Fed were to blow through the rest of its current stock of Treasuries, it would have invested more than $2500 for every man, woman, and child in America. Public investment in the financial sector would have exceeded the direct costs to date of the Iraq War by a wide margin. Would that that be enough? If not, how much more? Just how large a risk should taxpayers endure on behalf of companies that arguably deserve to fail, to prevent "collateral damage"? Have we considered other approaches to containing damage, approaches that shift costs and risks towards those who benefited from bad practices, rather onto the shoulders of taxpayers and nominal-dollar wage earners? Does this sort of policy choice belong within the purview of an independent central bank? [More]

I am not, along with other observers labeling the action incorrect, just monumental in its scope. I don't begin to pretend to understand the subtler nuances and consequences of this magnitude of intervention, but collateral developments seem to indicate the credit markets are indeed not right. At least not yet, perhaps not for a long time.

The most likely places for this effect to be felt for us on the farm are a) ag lenders who depend on investor money versus deposits, i.e. the Farm Credit System, CoBank, etc. and b) agribusinesses who buy and sell to us, as their commercial paper and credit-worthiness comes under new scrutiny in a suspicious market.

One indicator for me is the virtual dismantling of the municipal bond market. Once a haven for tax averse investors, the combination of government money, elected officials, and enormous fees provided a breeding ground for questionable practices and taxpayer ripoffs. That is all coming apart now, making the future for government funding of roads, schools, etc. much more expensive if even possible.

The shrinking of the municipal bond industry means it is going to cost more for states and localities to borrow money. That means the tolls, fees and taxes that support the debt are all going to have to rise.

You can't expect two of the top 10 underwriters of bonds to disappear without consequences. UBS AG said it was getting out of the municipal bond business on May 6. Bear Stearns Cos. is being absorbed by JPMorgan Chase & Co.

We don't quite know how these two events are going to play out -- UBS is apparently transferring a number of municipal bond traders into its wealth-management division -- but taking away two major bidders can't be good news.

We are probably just at the beginning of the cycle of layoffs, cutbacks through attrition and more outright exits. Banks are going to be looking at who makes the money, and if the municipal bond department isn't, you can guess the rest. [More]

It will be some time before the ramifications of this problem flabbergast enough small school boards and county officials to provoke interest in rural America. But farmers could see changes in their lives and businesses much sooner.

The credit crunch shut down forward contracting, and though it appears to be re-emerging, it will be far more self-financing from the farmer perspective than before. I think similar changes in familiar practices as simple as pre-pays or billing cycles will likewise be altered to exploit a new source of investment funds: American farmers.

Bluntly put, we will be encouraged to to prepay to fund vendors, to deliver grain unpriced to fund customers, and fork over deposits on new machines for later delivery. Our prosperity is a poorly kept secret and steadily rising prices on both sides make these actions seem reasonable until we find ourselves an unsecured creditor because a vendor/customer folds under the whopping financial risks being taken on a by fairly staid old industries.

Speaking of paranoia, it has recently dawned on me that one reason I could be having trouble getting delivery windows for my priced grain is it requires cash to settle with me, whereas NPE deliverers can keep the plants running without immediate cash required. My customers seem to want me to carry the storage risk, as well as their credit and margin risk as long as possible.

For an industry still looking at barely enough corn and beans to supply needs, this refusal to take physical and monetary ownership of grain is a risky maneuver IMHO. What will they do in the fall with a 12B corn crop, and little coverage?

New York City is a lot closer to Prairie Township than it used to be.

2008-05-13T10:48:00.003-06:00

There is a sport for everyone...

But just who it would be for cheese-racing, I don't want to know.

Introduction

Q: What do you think happens when you throw a slice of processed cheese (without removing the plastic wrapping) onto a lit barbeque?

The plastic melts giving off highly toxic fumes and you are left with a pretty grim cheese/plastic mess welded on to your BBQ, right?

WRONG!

Unbelievably what actually happens, as discovered by the pioneers and inventors of the sport way back in 1997 (read their account of that historic night on a campsite in Osmington here), is that the plastic pouch does not melt - even when the cheese inside eventually boils! Even more incredibly, as the cheese melts and the strange chemicals found in processed cheese turn to gas - the plastic pouch inflates until eventually all four corners lift off the BBQ and the pouch is fully inflated! Now under this pressure you might think that the pouch would eventually burst - but no - most of the time the seal remains intact!

Quite why processed cheese manufacturers choose to use such industrial strength, heat proof plastic to encase their products is something of a mystery - as is why NASA don't use this material instead of those expensive heat proof tiles on the space shuttle? Such important questions no doubt occurred to the first observers of this phenomenon on that night in Osmington, but that didn't stop them from coming up with a brilliantly simple sport based on it.

The Game

Each player throws a slice of cheese onto the BBQ.

The player whose cheese fully inflates first wins! [More, but please don't]

[via Presurfer]

2008-05-13T06:06:00.004-06:00

The problem with the oil bubble...

Some observers are starting to chance predictions of a collapse in oil prices, but is it really a "bubble"?

Oil prices climbed to their highest level ever, reaching over $108 per barrel this week. And Americans are feeling this price spike at the pump, with gasoline averaging $3.22 per gallon. An analysis released by the investment firm Goldman Sachs suggested that oil prices might soar to $200 per barrel. Does this make sense?

Not really. Although U.S. crude oil inventories have fallen, gasoline inventories are at their highest since March, 1993, notes Tim Evans, an energy futures analyst at Citigroup's Futures Perspective. World oil production was up 2.5 percent in the first quarter of 2008 over the same period in 2007 while world oil consumption rose by just 2 percent. In fact, world production is projected to be 3.3 percent higher in the second quarter and 4.1 percent higher in the third quarter than the same periods a year ago. On the other hand, world demand is projected to rise by just 1.6 percent over the next six months. [More]

Bailey, with whom I usually agree wrote this in early March - and already it looks wobbly. He is not alone. In my commentary last week on USFR I mentioned that the oil fundamentals seem to have less effect on price than before. One reason I suggest for this apparent flaunting of fundamental market economics is the delay factor allowed by dwindling but still-ample credit. We'll change habits only after our cards are maxed out.

One viewer added a salient - however unsettling point:

With respect to your commentary at the end of the first segment this past
week, the law of supply and demand says that as price rises demand only
drops when price exceeds the equilibrium price. Perhaps the equilibrium
price has not yet been met.

If true, and the equilibrium price is still somewhere above current prices, what the heck is going on? Many folks put it down to speculators, but this effect cannot last forever. Sooner or later, they want their price-boosting investments dollars back. This is the great cry from those looking backwards to historic price actions, but again, the identification of a speculative bubble is not universal.

“The Oil Bubble: Set to Burst?” That was the headline of an October 2004 article in National Review, which argued that oil prices, then $50 a barrel, would soon collapse.

Ten months later, oil was selling for $70 a barrel. “It’s a huge bubble,” declared Steve Forbes, the publisher, who warned that the coming crash in oil prices would make the popping of the technology bubble “look like a picnic.”

All through oil’s five-year price surge, which has taken it from $25 a barrel to last week’s close above $125, there have been many voices declaring that it’s all a bubble, unsupported by the fundamentals of supply and demand.

So here are two questions: Are speculators mainly, or even largely, responsible for high oil prices? And if they aren’t, why have so many commentators insisted, year after year, that there’s an oil bubble? [More][Tyler Cowen comments here]

But part of that analysis rests on the demand for gasoline being the key to oil demand. That seemingly basic fact is more in doubt than before, as farmers everywhere are discovering with every fuel load.

Meanwhile Murti says demand for middle distillates, like diesel, gasoil, heating oil and jet fuel and kerosene is racing up. The difference in prices between gasoline and middle distillates, known as a crack spread, has been exceptionally strong signaling tightness in global refining capacity.

Just a year ago US RBOB spot gasoline prices were worth some $92.60 per barrel while NWE jet was priced in at some $83.3, a discount of over $9 per barrel. Today that same jet fuel is nearly $30 more expensive than RBOB, and has led to U.S. refinery Valero switching production by up to 7 percent from gasoline to gasoil.

Murti attributes that strength to resilient non-OECD demand growth as well as numerous global power problems, all of which have led to increased usage of diesel and gasoil-fired generators. [More]

If true, watching US car sales pattern shifts and driving habits may not be the best way to gauge demand. Moreover, it a key difference between today's energy economics and other oil price spikes. If industrial activity takes over (thanks to expanding global economies) from consumer use as the demand leader, will old price patterns hold? I think not.

One key will be to watch to see if the spread between diesel and gas widens. Until refineries change the distillate output mix, we could see some strange disconnects between gas and oil prices.

And some blistering diesel costs.

2008-05-12T16:50:00.002-06:00

Another reason I am bearish...

On production agriculture employment. Ag is just sticking its toe in the pools of state-of-the-art technology. Frankly, the profits have never been there to make it pay, but now we can't bring these tools on board fast enough. And check out what they can do:

It's almost as creepy as this.

Don't get me wrong. I am very optimistic about agriculture - especially industrial ag - but I'm not kidding myself that it won't be one of the hardest professions to get into [and stay in].

2008-05-12T10:59:00.003-06:00

Timing is everything, Chapter 21...

Just what you need for the perfect Father's Day gift: Beer soap.

Except it sold out last week.

[via Andrew Sullivan]

2008-05-11T10:42:00.002-06:00

China changes everything...

In an obvious good business move, China is encouraging its newly wealthy investors to buy farmland in other countries to secure a food supply.

China is losing its ability to be self-sufficient in food as its rising wealth triggers a shift away from diet staples such as rice towards meat, which requires large amounts of imported feed.

China has about 40 per cent of the world’s farmers but just 9 per cent of the world’s arable land. Some Chinese scholars argue that domestic agricultural companies must expand overseas if China is to guarantee its food security and reduce its exposure to global market fluctuations.

“China must ‘go out’ because our land resources are limited,” said Jiang Wenlai, of the China Agricultural Science Institute. “It will be a win-win solution that will benefit both parties by making the maximum use of the advantages of both sides.”

In the first quarter of this year, food prices in China rose 25 per cent from a year earlier, the highest level of farm inflation since the early 1990s, said UBS.

China is still a net exporter of agricultural commodities but is increasingly reliant on soybean imports and is about to become a net buyer of corn.

It imported up to 60 per cent of the soybean it consumed last year and the crop would be a focus of policy support for companies acquiring land overseas, along with bananas, vegetables and edible oil crops, said an official familiar with the ministry’s proposal. The ministry is already talking to Brazil about the possible acquisition of land for soybean, according to this official. [More, with free registration]

Like the the climate change, energy, health care, and other complicated issues facing nations today, it seems we in the US are constantly being surprised by the forward thinking and risk-taking of other nations. Maybe it's because we are losing our pioneering spirit, and becoming more conservative.

But it could simply be market forces doing what they do best, helping all participants to maximize their return. Regardless, it hard not to admire in some way the staggering progress China is making year by year. And to consider soberly what it means to our part of the world.

2008-05-11T08:20:00.000-06:00

The Engineer's Guide to Cats...

For Jack and Kristi.

[via Monkey Cage]

2008-05-11T06:04:00.000-06:00

Digits are destiny...

A great debate is going on in the economic and investor community about the status of the American housing market. Has it bottomed? Or is there even more depressing news to come?

Regardless of your particular prognostication, consider the graph below from an article on the geography of the house price mess.

Note that the long term rent-to-price level seems to wander around 5%. It struck me because I've always used 5% as the quick-and-dirty factor between cash rents and land prices: $300 rents are to be expected for $6000 dirt.

Or vice-versa.

What if 5% is some kind of embedded value in our brain, and we revert to it as nominally fair over the long-long term for any kind of capitalization problem? I think that could be the case for a simple reason: it's easy to calculate in your head. Double the rent and add a zero. Or halve the price and lose a zero.

In the heat of deciding what's fair, rules of thumb can take over if time is of the essence.

We could be simply trapped in a decimal system and wedded to 5% because we have ten fingers. If we were base-8 for example, we'd settle for...don't rush me now...carry the two...and , ummm...something else.

Look, it's just a theory.

2008-05-10T11:25:00.000-06:00

A new high score for cynicism...

Although I agree with almost all of his points, this list of Top Ten Modern Myths was a sobering read. A sample:

5. The myth of management

This claims that people can be managed like warehouses and airports, and that some other people are especially good at it. This is entirely wrong, although it has spread over the UK like the grey goo that some fear nanotechnology would unleash (manotechnology, perhaps, and just as lethal). People can be persuaded, and ordered, given incentives and penalties, suppressed and killed, but not managed. Human affairs can be administered, but administration is not management. One administers to people and their needs. One tries to manage them by ignoring whichever of their needs is inconvenient and by treating them as a mere means to your own ends. But, mirabile dictu, people treated like that become irritable and subversive and quite quickly unmanageable.

Marxists and Hegelians would say that management thus contains its own contradiction, or deconstructs itself, although this is disguised by free use of the myth of meaning (qv). The usual response is to hire more managers to manage the mess, and more layers of managers to oversee the managers. The criminal justice system is a wholly ineffective attempt at managing people. An extreme kind of manager is called a consultant, whose claim to expertise is that he costs more. There are, however, three good reasons for employing consultants: it passes the buck; it is public money; and it is easy to justify such expenditure to auditors, who lunch with consultants and are interchangeable with them.

I pause to remind myself, that despite the obvious truth of these statements, progress is made, and lives improve everyday. Spotting faults is an overrated skill.

2008-05-10T09:38:00.000-06:00

Omens and Portents of Doom...

If this isn't a sign of the End of Days, I'm sending back my Official Oracle Certification I got on the Internet for $19.95.

Biologists Names New Spider After Neil Young

ScienceDaily (May 8, 2008) — An East Carolina University biologist has brought his admiration of Neil Young to a whole new class. Or species, to be exact. [More]

2008-05-09T23:17:00.000-06:00

Score one for the bovines...

This has been around for a while, but we enjoyed watching it and providing running commentary here at USFR.

Wait for it.

2008-05-09T21:30:00.000-06:00

Ask your college student...

About their professor reviews. These feedback opportunities are proving to be a little upsetting to the coddled life of academic tenure.

Suppose, f'rinstance you got a review like...

Aside from the fact that I learnt nothing of value in this class besides the repeated use of the word “postmodernism” in all contexts (whether appropriate or not) and the fact that Professor Venkatesan is the most confusing/nonsensical lecturer ever, the main problem with this class is the personal attacks launched in class. Almost every member of the class was personally attacked in some form in the class by either intimidation or ignoring your questions/comments/concerns. If you decide to take this class, prepare to NOT be allowed to express your own opinions in class because you have “yet to obtain your Ph.D/masters/bachelors degree”. We were forced to write an in-class essay on “respect” (and how we lacked it) because we expressed our views on controversial topics and some did not agree with the views of “established scholars” who have their degrees. [More]

I have long mused about a "How am I farming?" bumper sticker with an 800-number to call. Wouldn't be refreshing to anonymously call in to some doofus and say, "Dude, what were you thinking with that disk on wet bean stubble?"

2008-05-09T16:29:00.000-06:00

So, what happened to yours?...

How folks spent their stimulus money.

[via neatorama]

2008-05-09T11:07:00.001-06:00

Where inflation comes from...

A superb illustration of how to convey complex calculations visually on the Internet.

2008-05-09T08:28:00.000-06:00

A chance to end an argument...

With oil prices climbing relentlessly - much to the dismay of analysts who thought demand would tail off above $100 or so - most of the clamor is understandably unhappy. And the forecast is even more alarming.

But in her inaugural post at Biofuels Update, TP editor Jeanne Bernick shares some new perspective from one of my favorite ag economic myth-busters, Bruce Babcock, who told legislators:

" ...that changes in federal biofuels policies now will not have a dramatic effect on food prices in the short term. And in the longer run, corn and food prices will be determined largely by the price of crude oil."

Biofuels proponents will undoubtedly seize on this opinion as a reason not to touch the the government training wheels for the ethanol industry, since it wouldn't help food prices much.

I think that would be reading it backwards. Here's the key conclusion for me:

Second, in the long run, if gasoline prices rise even higher and signal that we need alternative fuels, the corn ethanol industry will expand well beyond current projected levels even without government subsidies, unless production is somehow capped. [More]

What we are staring in the face is a gold-plated (or oil-smeared) opportunity to bullet-proof the ethanol industry from the whims of legislation and popular belief. We could lose the subsidies and never look back.

Best of all we can start working at our real profession - growing things people want to buy - instead of trying to manipulate government officials and consumers with spin and pathos.

Just think about it. Critics can write or say anything they want, and we won't even have to listen. We'll just answer to the market.

2008-05-09T05:42:00.000-06:00

On second thought...

Maybe my weather isn't so bad.

[More]

[via Andrew Sullivan]

2008-05-08T18:40:00.002-06:00

Hillary, Monsanto, and "Itchy and Scratchy"...

Americans often like their drama predictable. One of the best news story lines now is about the monster corporation versus the puny individual victims. In our world, few entities can be cast as the monster as easily as Monsanto. So we get stories that any of you could write by formula.

A case in point: Monsanto and the Heroic Broadcaster

For weeks, Brownfield had been ripping Monsanto on air for its policies of enforcing its seed patents against farmers.

On the April 16 show, Brownfield’s topic was seed industry concentration in America.

His guests were Fred Stokes, president of the Organization for Competitive Markets, and Michael Stumo, general counsel of the group.

Stokes and Stumo were promoting a new project to study corporate concentration in the seed industry.

Monsanto is the dominant player in the global seed industry and has a reputation for playing rough.

Any guesses as to the rest of the story? Let me reassure you - you've got it right.

“And I’ve been saying to Stan, settle down, it will all be alright,” Lear said. “But I imagine Stan is getting a lot of pressure from his sales executives. We have three that call on Monsanto for different products. And I would assume that he is getting pressure from those sales executives. When those sales executives call on Monsanto, Monsanto is complaining to the sales executives. That is where the connection happens. But you would have to talk to them about the kind of leverage Monsanto is putting on them. They have never to my knowledge threatened to pull any advertising.” [More]

Long story short: the radio personality loses his show. But this melodrama is curious to me for several different reasons:

Are guys still trying to save soybeans? Good grief, relatively low seed cost is one issue many of us are looking to plant more beans if we could only &%^#@ forward contract 2009 production. People, this is 2008, not 1996! If you want to save seed don't sign the contract and buy the RR seed.
The article references the Vanity Fair screed against Monsanto which similarly is about a decade late in its targeting because they work from the agrarian viewpoint.
A more interesting story, IMHO, is how the rBST issue developed and how it may point to a flaw in the Monsanto strategy on intellectual property (more below).
Left unsaid in the broadcaster story is the overriding problem of all broadcast media - declining and fragmented viewers/listeners. Many cutback are occurring under duress of lower advertising because dollars are flowing to media like..well, this one. Monsanto, for example, helps fund individual bloggers (I wish), seemingly unrelated interest groups, and other non-traditional media. I know because I always check the "About Us" disclosures, and simply ask bloggers. It's good to know where opinions are coming from when you link to them.

You have to be careful about stories like these. If advertisers only spent money to control media content, we really aren't delivering any intrinsic value to begin with. If the articles in FJ or the stories on USFR are of no interest to farmers, what the heck do we think we are doing? The inference that advertisers fork out bucks to control content rests on the content being valueless to begin with. I want advertisers to want their ads to be seen by readers who like to read my stuff, and that is the core of the business.

Besides, there is an inherent problem with greenmail - pulling ads to influence editorial content. As many married couples discover, you can only withhold so much of a desired good. Once you have stopped your ads, your influence drops to zilch.

Whenever a corporation has an issue with an individual, you can be assured who the victim will be in the story. It's reached a point of lameness for me. I'm looking for "man-bites-dog" instead. So this story and its slant will hardly generate the outrage/concern/disgruntlement it might have even a few short years ago.

But there is a much bigger question for me. The policy of constant confrontation, never giving an inch, scorched-earth, whatever it takes, unrelenting attack, (add your euphemism here) is losing its meager attraction for many of us.

I am convinced one big reason for the appeal of Barack Obama is his relatively non-confrontational approach, especially compared to the now increasingly belligerent voice of Hillary Clinton. Count the number of times she uses the word "fight" in her stump speeches. Fight, fight, fight.

As we are discovering in Iraq, all-war-all-the-time is good for [survivors'] military careers and defense contractors, but few else. And oddly enough, it is slowly dawning on America perhaps, that there may be situations where fighting will not produce a solution. But by being wedded to a philosophy of absolute victory by one means only, we slog on, and in the process we more than satiate our appetite for conflict.

The point I'm laboring to get to is I now have doubts about the efficacy of "hardline" tactics in the public relations of intellectual property rights. I'm sure PR firms have done oodles of research on this, but since any suggestion of restraint or simply shrugging something off some event conflicts with their bottom lines, I'm not sure how seriously they would embrace or recommend such. You don't need writers and spokesmodels and ad placements to remain silent, for example.

Frankly, I now try to avoid commerce with in-your-face business partners. They wear me out. I am looking for leadership with brains to innovate new choices, an ability to articulate a vision and a history of choosing conflict last. We've tried cramming our beliefs down the throats of competitors, customers, and casual bystanders - and it has produced checkered results, increasing pushback, and a remarkably irritable population even in the midst of our wealth.

I have issues with Monsanto as a farmer, but these are the same issues I have with other seed companies. The market will sort this out as soon as tighter producer margins begin the market share battle in earnest. I don't need to tell them how to run their side of the business.

But I would suggest lightening up a bit. All of us, for that matter. We're losing much of what agriculture is supposed to hold safe for America - a rural comity that is crucial in all who touch the land. You don't have to win every bout by knockout, you don't have to pick every fight, and the costs of constant conflict are becoming more obvious every minute on our farms.

Domination may sound like a winning strategy, but only if you do it in a way that others don't feel dominated. Focused winners seldom are surrounded by friends, just sycophants and hangers-on.

I've put up with tough. I'm looking for amiable.

2008-05-08T15:07:00.003-06:00

The mildly awaited CFTC post...

I have been trying to get my head around what I would do if I was King and in charge of the issues confronting the CFTC. After sniveling about watching my marketing plan - which essentially consisted of forward pricing at the wrong times - go up in smoke after March 7 when Cargill ran out of interest in paying my margin calls, I have pondered long and deep ponders about what to do.

Others have too. One idea is to extend the speculative limit to the newer market participants.

The speculators, now so bullish, are mainly the index funds. To see how their influence on the market has become outsized, just look at how they operate. Nearly $9 out of every $10 of index-fund money is not traded directly on the commodity exchanges, but instead goes through dealers that belong to the International Swaps and Derivatives Association (ISDA). These swaps dealers lay off their speculative risk on the organized commodity markets, while effectively serving as market makers for the index funds. By using the ISDA as a conduit, the index funds get an exemption from position limits that are normally imposed on any other speculator, including the $1 in every $10 of index-fund money that does not go through the swaps dealers.

The purpose of position limits on speculators, which date back to 1936, is clearly stated in the rules: It’s to protect these relatively small markets from price distortions. An exemption is offered only to "bona fide hedgers" (not to be confused with "hedge funds"), who take offsetting positions in the physical commodity.

The basic argument put forward by the CFTC for exempting swaps dealers is that they, too, are offsetting other positions — those taken with the index funds.

Position limits on speculators, in some commodities specified by CFTC rules and in others by the exchanges, are generally quite liberal. For example, the position limit on wheat traded on the Chicago Board of Trade is set at 6,500 contracts. At an approximate value of $60,000 worth of wheat per contract, a speculator could command as much as $390 million of wheat and still not exceed the limit.

But at least one index fund that does trade the organized commodity markets directly and must therefore abide by the rules — PowerShares DB Multi-Sector Commodity Trust (DBA) — recently informed investors that it was bumping up against position limits and therefore would change its strategy.

No such information is available from individual swaps dealers. But based on CFTC data on their total position in a commodity like wheat, together with the fact that only four dealers account for 70% of all the trading from the ISDA, it is quite clear that if the exemption were ever rescinded, the dealers’ trading in these markets would no longer be viable.

Speculators also use the older commodity pools, whose position is likewise tracked on the charts. The pools, open to sophisticated investors, are flexible enough to sell short as well as buy long and are subject to position limits. But since they are generally trend-followers, they will almost always go long in bull markets. Through most of the recent period, then, the pools have been adding to the price distortions caused by the index funds. Add the pools’ bets to those of the index funds, and speculative money forms 58% of all bullish positions.

To get a further idea of the impact of these speculative bets, Barron’s asked Briese to measure them against production in the underlying markets. He calculates that in soybeans, the index funds have effectively bought 36.6% of the domestic 2007 crop, and that if you add the commodity pools, the figure climbs to 59.1%. In wheat, the figures are even higher — 62.3% for the index funds alone, and the figure jumps to a whopping 83.6% if you add the pools. Betting against them as never before are the commercials, who deal in the physical commodity.

The CFTC provides these figures on index trading for only 10 commodities. Why are such major commodities as crude oil, gold, and copper excluded? The agency’s rationale, which even certain insiders question, is that it would be hard to get reliable information on these other commodities from the swaps dealers. [More]

The concept as I understand it is to slow or divert the avalanche of fund money into these relatively small markets. Other ideas include new rules to promote, even force convergence of cash and futures.

Another issue likely to dominate the hearing is the notion of "convergence" and whether financial investors have distorted it. A futures contract is an agreement by one side to buy, and the other side to sell, a commodity at a set price on a set date. Often traders make offsetting trades to get out of their bets, but if they don't, futures contracts often result in physical delivery of a commodity. As a futures contract gets closer to its expiration date, the price is supposed to converge with the price that actual wheat or corn, for example, is trading at on the open "cash" market. The commission will be looking some instances of discrepancies in those prices. [More]

I find the attraction of "fixing" something powerful, and apparently so do regulators and politicians. The only problem for me is I really cannot come up with an idea that does not carry enormous risks to an already skittish market in a time of production questions of the first magnitude.

Above all, I have learned to respect mightily the power of Really Big Money to skirt any government rule. Consider campaign finance "reform" - whoo, boy! We really cleaned up that act. In fact, it was the astonishing success of the Paul and Obama campaigns to use micro-finance with million of small contributors to thumb their noses at big donors that gave me an analogy to work with. This problem needs some nerds and some Internet thrown at it, methinks.

So, here is my One Point Plan for Government Relief:

Don't do anything.

I have several reasons for inaction. First, this is not simply a fallback to textbook laissez-faire economics. I have no problem with taking appropriate action when rules are poorly drawn up and hampering the market flow. But here we have too much flow, not too little.

Second, I don't think anyone has the faintest idea of all the unforeseen consequences of say limiting index investment, but surely one would be to greatly reduce the fund dollars in the market. This strikes me as a bad thing. While too much liquidity has made some pretty hairy trading days, those days have been at prices I would have sold my grandmother for a coupla years back.

Kicking people out of the pits because they have too much money is a form of refusing to stand ready to trade anytime, anywhere - something US producers work hard to promote as part of our brand.

Finally, I don't want the CFTC to come up with an answer; I want some clever entrepreneur(s) to find one (or several). In fact, I have recently been persuaded that work-arounds and incremental mitigation are bubbling up from grain merchandisers, traders and people who see an opportunity to make a few millions from an obvious market inefficiency.

For example, to get back to my marketing problem, what if my customer devised a way to bring in a separate funding source to alleviate both our bank accounts? What if forward contracting became a reward for valued and loyal suppliers (farmers) in exchange for a stronger supply ties? You can't tell me the brains in the grain business are looking at a narrowing future supply of corn (and other commodities) and not spurring the MBA's in the upper floors to find vehicles of some sort to solve this issue.

Best off all, we could have many different solutions to these risk issues and the market can sort out the winers and losers. And much if not all of this business can be funded by those very speculators who want to own our output for whatever reason.

Which is a good thing, remember.

If I could honestly embrace with enthusiasm some regulatory/legislative fix, I would. But my instinct when I can't find that idea anywhere is to first do no harm. Then we start the iterative process of experimentation by innovators to see what works. It will happen anyway, especially as the stakes continue to grow. And it's as American as a Toyota.

[Thanks, Chris and Art]

2008-05-08T10:42:00.000-06:00

A number that could change your farm...

Suppose some analyst could come up with a "sustainability rating" for your farm output, similar to an EER or MPG sticker. At the very least, a new level of competition would be generated. I also think - depending on the science/economics behind the number - it would help settle much of the dispute over the virtues of agrarian and industrial agriculture.

Anyway, you can guess where it will show up first.

However, the German environment minister sees doesn't see biofuels as posing the greatest danger to the rainforest. He'd much rather that Germans came to an uncomfortable realization: the big problem concerns the soya that Europe imports as animal feed, and the subsidies that support European farmers. "German farmers are profiting from the logging of the rainforest much more than Brazilians," Gabriel said. He argues that German society must take a hard look at its meat consumption.

From his ministry in Berlin, Gabriel is working to put a sustainability rating on animal feed and other products. That could have serious consequences for companies and consumers that get cheap meat thanks to the deforestation in the rainforest. [More]

It will likely be a long time coming, but I could see this happening, and some wild consequences, not all of which would be bad.

2008-05-08T06:09:00.004-06:00

Just say no...

As Congress labors to keep sending money to rich people like me (no brag - just a startled fact from looking at my income percentile - and the last thing I expected), a few of us are coming out of the closet to say we don't need direct payments.

Good on 'ya, mates. I think we now may be about 2% of the industrial farm population. (This is a made-up number - something we use often in ag arguments)

2008-05-08T05:54:00.000-06:00

Now we're getting somewhere...

In the frantic push to find something other than biofuels to blame for food shortages, I think we have winner: golf.

Reuters reports that surging Asian economies, rising living standards, and a younger generation that prefers less labor-intensive resort and golf course employment have hurt Asian rice production.

The Filipino government has ordered a halt to the conversion of farmland — which developers recently challenged — and Beijing added golf courses to its list of banned land usages. [More]

Interestingly, the golf industry is not thriving here in the land of exorbitant greens fees. Along with most leisure pursuits requiring exertion, numbers are down. Still, since I don't play, I can happily blame those guys for the food crisis.

2008-05-07T20:21:00.000-06:00

I used to love carnival rides...

Long ago at county fairs. But this just reminded me why they are for younger inner ears. [NSFDS - not safe for delicate stomachs]

Cinco De Mayo Carnival from Andrew Curtis on Vimeo.

[via Neatorama]

2008-05-07T19:37:00.000-06:00

In Memoriam...

This week saw the passing of a wonderful element of our lives: the Chicago Tribune. For many years we could receive the Trib by about 11 am. in the mail because it was remotely published in Champaign which just happens to be our main depot for the USPS - so we could get a same-day, big-city paper.

Reading the paper was a central event in both our lives, and we are lost right now. As much as I love on-line reading, I'm still from the newspaper generation, and we both loved Chicago. We considered ourselves living in the far, far suburbs.

I'll miss the Op-Ed, the news, and especially the comics. And I'll miss those daily reflective moments not at the computer. My guess is this contraction will be mirrored across the US as papers die by inches.

I know - what a whiner!

Still, at our age we are saying goodbye to many wonderful things, even as we embrace happy new things.

2008-05-07T13:33:00.003-06:00

This is your brain with BTO's around...

The powerful emotions that arise when our operation faces competition with a much larger farmer appear to be hard-wired. What's worse, I believe cash rents have introduced a level of arbitrariness that creates what sociologists call an unstable hierarchy. The results take a toll on our performance, happiness, and health.

Regardless of the type of hierarchy, subjects' brains were influenced by their place in it. Just viewing a picture of a "superior" player activated an area in the frontal lobe that is associated with making judgments about people. The effect was more pronounced in the unstable hierarchy, with brain regions implicated in emotional processing and social anxiety chiming in.

The study "confirms that our brains are exquisitely sensitive to position in the hierarchy," says epidemiologist Michael Marmot of University College London. "If the hierarchy is stable, we seem to ignore those below us but focus on those higher up. If unstable, and we are in danger of losing status, areas of the brain linked to emotions are aroused." [More]

It would explain why many guys I know don't even like to read articles about BTO's. Acknowledging our sensitivity to status, and learning to cope better may become a much higher priority for us. These emotions are not just powerful, they are very hard to ignore. They affect our decisions, and bleed over into other areas of our lives. It is not, perhaps, an Oprah-esque pursuit to understand how they evolved and why they can be disruptive in modern situations. They are obviously part of our human inheritance.

Therefore, maybe we need better defenses from competition than simply expecting preferential treatment because we are established farmers and community members.

I'm not saying good community standing isn't important and without its own rewards, just simply it hasn't appeared to be a sufficient counter-strategy to date for competing with large operations.

[via Andrew Sullivan]