Did I miss anything?...

Now that was a break!  I just kinda dropped out as a string of events from speeches to church to computer sucked up my time. Oh yeah - I also got totally sucked in to a couple of cheesy SF novel series (No, I'm too embarrassed to tell you which ones).

I'm also deciding which of my favorite sources to subscribe to as the free Internet is slowly evolving into free sponsored-content pitches or usable subscription-based sources.

Plus, once you get out of the habit of posting...

So let's start slowly with a burning question: Why do Danes eat so much dang fruit (apples and oranges, anyway)?

[Click to make readable]

[Source]

I'm open to guesses.

The second morsel will undoubtedly be just the beginning of a longer discussion about water.

But faced with fast changing ecological trends that put the nation’s water and food supply in jeopardy, America exhibits little of the national resolve it once had to address the challenges. The country, by and large, is not developing new ideas about pollution control, making new investments in water conservation, and inventing new and environmentally friendlier production practices that respond adequately to new conditions.This is one of the central findings of Choke Point: Index, Circle of Blue’s penetrating assessment of water supply and consumption in three iconic American agricultural areas – the Great Lakes in the country’s Midwest, the Ogallala Basin of the Great Plains, and California’s Central Valley.The second conclusion of Choke Point: Index, drawn from months of field reporting and data collection and analysis, is that the United States’ important food-producing regions are buffeted by the same pollution, scarcity, and water-security deficits that affect China’s Yellow River and Yangtze River basins, India’s Punjab, Australia’s Murray-Darling River Basin, Mexico’s Tehuacan Valley, and other prominent global food baskets.Yet just like farmers and government leaders on other continents, U.S. growers and elected officials cannot agree, or choose to overlook, the urgency of changing conditions, or the potential for real solutions. Instead American agriculture, and its international counterparts, pursue the business and marketing strategies that led to the precarious condition of national fresh water reserves in the first place: Produce more grain and protein. Use more water. Apply more fertilizer and farm chemicals. Consume more energy. [More]

Finally, this thought which has been the subject of a casual search: Did anybody call this rally for corn to over $5? Not just throwaway "volatility" comments, but an actual marketing tactic of seriously expecting selling new crop when above $5? My memory has been, with the exception of Sue Martin (who is congenitally optimistic) and Mike Florez (technical trader), the folks on USFR and in print have been uniformly and relentlessly preparing us for $3 corn.

I have long been ambivalent on the value of market advisers, so consider my bias. But this rally looks like a surprise across the board.

Meanwhile, the enormous rent-seeking cost of Wall Street is slowly coming to light. One hot area is high-frequency-trading (HFT). That questionable practice may already be waning as a reliable revenue stream.

This is silly. I’ll tell you what happens when the little guy presses that key: his order doesn’t go anywhere near any stock exchange, and no HFT shop is going to front-run it. Instead, he will receive exactly the number of shares he ordered, at exactly the best price in the market at the second he pressed the button, and he will do so in less time than it takes his web browser to refresh. Buying a small number of shares through an online brokerage account is the best guarantee of not getting front-run by HFT types. And there’s no reason whatsoever for the little guy to think twice before pressing the button.
HFT is dangerous, I’d like to see less of it, and I hope that Michael Lewis will help to bring it to wider attention. But my tentative verdict on Flash Boys (I’ll write something longer once I’ve finished the book) is that it actually misses the big problem with HFT, in the service of pushing a false narrative that it’s bad for the little guy. [More]

I'm not sure this is the case for commodities, since they tend to lag Wall Street in their self-policing, but I reiterate my caution on trading anything on the exchanges - you are playing against folks you don't know using rules you often don't understand. While you may not miss the few cents you lose on every trade, it's enough to rack up huge profits for no value given. I'll stick to cash contracts, averaging, and my own idiosyncratic analysis and use the time saved for surfing and bad SF.

And to round off the morning, some too-late-for-me-but-not-for-my-grandchilden advice about bullies, from Wil Wheaton:

Later today, I will be beginning a whole-body computerectomy: replacing my iMac with a new one. My theory is the ~$2000 I spend every 2-3 years for a new machine pays for itself in speed and security and problems I don't have. Compared to rolling a combine it's a rounding error, and it makes me far more money than that pile of steel.

The diminished hammer...

Of all the dire predictions about the farm land market, I think we can deduce one thing: the action is going to change.  First, compare farmland with the red-hot fine art market.

And now, Bowley is naming names (and numbers) when it comes to the shadowy practice known as “enhanced hammer“. 

Officially, if you consign an artwork to Christie’s, and it is hammered down for millions of dollars, then you owe the auction house a piece of the action — known as “seller’s commission”. In practice, however, the art world’s biggest rollers never pay seller’s commission. For big-ticket items, the auction house is entirely reliant, for its revenues, on the buyer’s premium — the difference between the hammer price and the actual price paid. 

Increasingly, however, the hammer price has become completely meaningless. It used to give a pretty good indication of how much money the seller took home; no longer. Top clients, it turns out, aren’t just paying zero seller’s commission: they’re now paying a negative seller’s commission, and earning much if not all of buyer’s premium on top of the hammer price. [More]

"Enhanced hammer" would make a good pesticide name, BTW. 

Anyhoo, I think the buyer fee that had been introduced in some parts of the country may be about to die a deserved death.  And real estate agents may have to settle for more modest fees from all but clueless heirs who think they have to pay list price.

If the 80's are any foreshadowing, power is about to wander back to the land buyer, mostly becuase a lot of us will be scared to take on extra debt or part with cash. You'll be surprised I think how fast this transition will take effect, as it feeds on itself.

But I will also venture to forecast some of the greatest opportunities of our careers (or those younger than me, anyway) will not just knock, but hammer on the door. Those who have the courage and admittedly, inexperience could position themselves for the next ag boom.

And yes, there will be one.

Local boy makes big city news...

University of Illinois ag econ professor Scott Irwin, who I think has always struggled to escape the shadow of colleague Darrel Good, has emerged into the sunlight of a bizarre NYT "expose".  David Kocieniewski's amateurish hack-job purporting to show proof of academics for hire, is oddly devoid of, you know, facts pertinent to his conclusion.

Over the Felix Salmon at Reuters for the brutal takedown:

Ostensibly Respectable Academic Is In Fact A Hack: it’s a hardy perennial, and an enjoyable one at that. The best example is Inside Job, where big names like Ric Mishkin and Glenn Hubbard got their well-deserved comeuppance. And it’s a genre I’ve indulged in myself: last year, for instance, I spent 4,500 words on a paper by Bob Litan, showing how he lies with numbers to arrive at his paymasters’ predetermined conclusion.But here’s the thing: for this kind of article to carry any weight, it has to demonstrate the mendacity or venality of the academics in question — and, ideally, those academics should have a high-profile reputation which deserves to be tarnished.Which is why David Kocieniewski’s article about Craig Pirrong and Scott Irwin this weekend is such a disappointment. It’s currently doing very well on the NYT’s most-emailed list, but it’s easy to guess who’s doing the emailing: people who love to hate Wall Street, and who will use just about any possible excuse for doing so. Because in this case Kocieniewski has missed the mark. Neither Pirrong or Irwin is mendacious or venal, and indeed it’s the NYT which seems to be stretching the facts well past their natural breaking point.Let’s start, for instance, with the one part of the article almost everybody will read: the big picture at the top of the article, showing the gleaming and extremely expensive University of Illinois business school. “The Chicago Mercantile Exchange has given more than $1.4 million to the University of Illinois since 2008,” says the caption, “with most of the money going to the business school.”That number — a very big sum, which is more than enough to buy research from for-sale economists — gets repeated further down the article:
Mr. Irwin, the University of Illinois and the Chicago exchange all say that his research is not related to the financial support.
This is carefully written to be as damning as possible. Yes, it makes perfect sense that the CME would fund a major business school right in its own backyard — and that it would fund activities related to its own business of commodities trading. But surely Kocieniewski is about to show us how the grants are linked in some way to Irwin’s research: no NYT reporter would write such a thing unless he had reason to believe that there was some kind of quid pro quo, or that the grants to the business school were written in gratitude to Irwin.
Except, if you keep on reading to the point at which you’re 2,500 words into the piece — and pretty much nobody reads that far — you’ll find this:

One of the most widely quoted defenders of speculation in agricultural markets, Mr. Irwin of the University of Illinois, Champaign-Urbana, consults for a business that serves hedge funds, investment banks and other commodities speculators, according to information received by The Times under the Freedom of Information Act. The business school at the University of Illinois has received more than a million dollars in donations from the Chicago Mercantile Exchange and several major commodities traders, to pay for scholarships and classes and to build a laboratory that resembles a trading floor at the commodities market.

While the C.M.E. has given more than $1.4 million to the University of Illinois since 2008, most has gone to the business school and none to the School of Agriculture and Consumer Economics, where Mr. Irwin teaches. And when Mr. Irwin asked the exchange’s foundation for $25,000 several years ago to sponsor a website he runs to inform farmers about agricultural conditions and regulations, his request was denied.

This is real jaw-on-the-floor stuff. The NYT has published an article about how academics who write nice things about Wall Street “reap rewards”, in the words of the headline — and its main illustration is donations to a business school where the academic in question doesn’t even work! Anybody trying to hold academics to standards of intellectual honesty has to be intellectually honest themselves. And the fact is that there’s zero reason to believe that there’s any connection between the business-school donations and Irwin’s research.

[More - no, I didn't excerpt all of it]

Felix has little heavy lifting to do to show this article is not supportive of its innuendo or tone. In fact, it's an embarrassment to the NYT editorial staff, IMHO.

The basis for this exercise is many want to believe speculators are ruining things for investors (or farmers), but as unlikable as those guys are, there isn't much proof to support this claim.  Besides, as I see it, any farmer who climbs in the ring with these guys at the urging of a market consultant shouldn't whine when he loses his shirt.

I'll stick with cash markets and forward contracts, thanks all the same. The kitchen looks too hot from where I stand.

One  more reason...

Why most marketing strategies are useless (IMHO). We are kidding ourselves as producers if we think we are going to consistently outfox the market.

The truth is we're not even in the real game.

Take the grain titan Cargill. The largest private company in the U.S., Cargill has gathered and shipped a bulk of the world’s supply of wheat and corn for more than 100 years. Nowadays, however, Cargill also sells billions in derivatives to food companies, and runs two massive hedge funds, managing morethan $14 billion for investors. Or take Louis Dreyfus, another major grain trader. In 2008, Dreyfus launched its own fund enabling investors to bet on food prices. By 2011, the fund had grown so fast it stopped accepting new money.Trafigura, the third largest global trader of energy and metals, runs nine funds that together manage approximately $2.5 billion. Last year Glencore, a metals and mining giant, and Vitol, the world’s largest independent oil trader, financed a $10 billion loanfor a Russian oil company. As businesses struggle to secure large sums from traditional banks, analysts say these companies could continue filling in for banks as a source of capital. Recently, some experts have also noted that extensive interlinkages between commodity markets and the financial system could pose systemic risks to the global economy."To the extent these companies [are] trading commodity contracts and selling investment products, they seem virtually identical in their scope of activities to the banks," said Marcus Stanley, policy director at Americans for Financial Reform.Unlike the banks, though, most trading companies are privately owned, release scant information, and escape most regulation. Goldman Sachs and J.P. Morgan might obscure their commodity activities to the public, but they are still obliged to privately disclose them to the Federal Reserve. Firms like Vitol and Cargill, meanwhile, operate in near secrecy. They must register their hedge funds with the Securities and Exchange Commission, but no regulator sees the full stable of their businesses. The lack of rules around “insider trading” in commodity markets also opens a backdoor to manipulation. [More]

Now add in Black Box trading and I think drawing all the clever lines on bar charts is busywork for people who struggle with a random world. And boy, is it!

First!*...  

My favorite policy wonk, Ezra Klein at WaPo posts on the same topic I used for my commentary this week on USFR: How the U of M sells their consumer sentiment survey results early to both the press and traders who scoop up "dumb money".

It’s not just media companies and financial data providers who have to grapple with this. The same applies to the research departments at investment banks, who periodically come under fire for giving their clients access to reports upgrading or downgrading a company’s stock before the information goes out to the rest of the world. As Richard Curtin, the economist who runs the University of Michigan sentiment survey, told the Wall Street Journal in defending the practice of early release put it: “This research is totally funded by private sources for the benefit of scientific analysis, to assess public policy, and to advance business interests. Without a source of revenue, the project would cease to exist and the benefits would disappear.”
Whether you’re a reporter who comes up with a scoop on the Fed, an analyst who has an insightful take on what a big company’s stock is worth, or a university doing a large and expensive survey, somebody has to pay the bills. And this conflict between the needs of investors — that limited, early access — and what is best for the public and markets as a whole, isn’t going away. [Short post worth reading]

The days of timing any market are over. And frankly, I think derivatives (options) are even more subject to HFT and black box trading. Like people managing 401K's, I'll stick to blind averaging or index-type funds.

*EK posted this afternoon. I recorded the show at 8 am.

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?

I would be surprised...  

If officials find much of the MF Global missing $$. So would others.

Federal officials looking for an estimated $1.2 billion missing from customers of MF Global Holdings Ltd. feel more and more that a lot of it may never be located, according to a report citing sources familiar with the probe.
What's been learned so far suggests that a good deal of the money may have “vaporized” because of scrambling in trading in the week before MF Global filed for bankruptcy protection Oct. 31, the Wall Street Journal reported, citing “a person close to the investigation.”

Many now think specific MF Global employees used money from a customer account meant to be walled off and used it to cover collateral requirements or to unfreeze assets of banks and others as they became more worried about how exposed they were to MF Global, the Journal reported. [More]

The TP seminar is underway, and this will be one of my questions to the analysts at the taping.
See their answers this weekend.

The case for volatility...  

It's not fun to watch the market these days, but there is a growing awareness in the economics community that wild price swings may actually be necessary with very complex financial systems in order to make them fully transparent on risk.

The argument is akin to ideas about forest management—when governments suppress the natural fires that periodically clear away forest underbrush, they create a build-up of flammable material sufficient to power a massive conflagration. I certainly think an equivalent truth applies to financial markets. The longer it has been since a painful collapse, the greater the willingness to pile on leverage and complexity, such that the next crisis becomes unmanagably awful. I think it's important to be careful in applying this idea, however. A few caveats are in order.
...

Macroeconomic stabilisation is consistent with healthy volatility; real shocks can be perfectly good at trimming back over-aggressive financial actors. It's a mistake to think that a deep, demand-side recession is the only thing that will do where financial-market discipline is concerned.
And that brings us to the third point: suppression of macroeconomic volatility isn't as big a problem for financial markets as is moral hazard. I'm not sure that the relatively smooth macroeconomic performance of the last 30 years was as big a contributor to financial-market vulnerability as was the practice of stepping in to bail-out key creditors at various points over that period, while simultaneously facilitating a big increase in leverage. Governments that develop a habit of bailing out institutions when crisis strikes, and which don't go on to reform regulatory rules to ensure that next time the system is robust to individual failures, well, they're begging to suffer a build-up of financial-market excess. [More]

For agriculture the volatility we are seeing now has been greeted by some of us as an endurable exercise, since it allows our demand base at least the opportunity to lock in some less expensive feed/feedstocks and lowers the massive overhead pressure of outside funds being long.

What this also calls into question is the value of technical analysis. I like to think of lines on price charts as "elephant tracks" - the evidence of the fearful, vain elephant in our emotional "old" brain. Alarming price moves soon wear out comparisons with price history upon which technical analysis is supposedly based.


Investors may be feeling the same way, and are "not going to the ball park", as Yogi Berra would say, in droves.

Last week’s record volatility in U.S. stocks ended after four days. The anxiety it instilled among mutual-fund investors may linger for years.

Investors pulled a net $23.5 billion from U.S. equity funds in the week ended Aug. 10, the most since October 2008, when markets were reeling from the collapse a month earlier of Lehman Brothers Holdings Inc., the Investment Company Institute said yesterday. The period tracked by the Washington-based trade group included three of the unprecedented four consecutive days in which the Standard & Poor’s 500 Index rose or fell by at least 4 percent.
The roller-coaster ride was unnerving for fund investors who have already endured the bursting of the Internet bubble in 2000, a 57 percent collapse in the S&P 500 Index (SPX) from October 2007 to March 2009 and the one-day plunge in May 2010 that briefly erased $862 billion in value from U.S. shares. The debacles, combined with falling home prices, unemployment above 9 percent and a lack of trust in government to bring down spending, may sour individual investors on domestic stock funds for an additional three to five years, according to Andrew Goldberg, a market strategist at JPMorgan Funds in New York. [More]

In our own industry, think about the cash rent negotiations in progress that just took a different turn. I am in the middle of new leases, and rethinking some of my bids. There is suddenly more justification for lower offers, and those offers will look pretty good compared to prices today. My thinking is this atmosphere offers a good chance to secure a reasonable rent along with a promise/mechanism to share any future windfalls for those owners who find that important.


It may not work as planned, but this window of sharply lower prices may be the grain farmer's equivalent of today's feed buyer opportunity to control lower priced inputs.

Contextor™ Lives!...

One of my favorite crusades has been to put popular farm statistics in context, so farmers understand better how we fit into the global economy. I have been criticized by listeners/readers that pointing out farming only contributes 1% to the US GDP is bad for our self-esteem. (Seriously, a FB operative actually said that.)

The problem I see with this fairy-tale approach is producers are a) ripe for being fleeced by those who sell us wildly overblown visions of our importance and 2) we make really bad decisions because we don't know how big the other players are.

Here is an example from commodity markets:

The money tells the story. Since the bursting of the tech bubble in 2000, there has been a 50-fold increase in dollars invested in commodity index funds. To put the phenomenon in real terms: In 2003, the commodities futures market still totaled a sleepy $13 billion. But when the global financial crisis sent investors running scared in early 2008, and as dollars, pounds, and euros evaded investor confidence, commodities -- including food -- seemed like the last, best place for hedge, pension, and sovereign wealth funds to park their cash. "You had people who had no clue what commodities were all about suddenly buying commodities," an analyst from the United States Department of Agriculture told me. In the first 55 days of 2008, speculators poured $55 billion into commodity markets, and by July, $318 billion was roiling the markets. Food inflation has remained steady since. [More] [My emphasis] 

While Kaufman is railing about speculators in the above article, about which I am less outraged, I was struck by the sheer numbers. I knew there was a flood of money coming in - I did not appreciate exactly how big this was.

Which kinda makes my point.

It actually never occurred to me...

I might be right about the Chinese yuan and their food problem.  But guess who supports appreciation in their currency all of a sudden?

China’s yuan traded near a 17-year high after Chinese Premier Wen Jiabao said a stronger currency will benefit the nation’s economy.
While the appreciation will be gradual, strength is beneficial as it curbs inflation, Wen said yesterday in an online interview with citizens. The government has set an annual economic growth target of 7 percent for the five-year period through 2015, compared with 7.5 percent for the preceding five years, Wen said. [More]

Commodities just got a little cheaper for some.

[Note also the slower growth targets.]

China, ctd....

Did some surfing on my own and found this re: heavy metal pollution and grain in China. This appears to be Kevin's source.

[Update]

Here's more on the problem.

 Meanwhile, both central government agencies and local governments in charge of areas with heavy metal pollution remained silent.

All this shrugging-off is unacceptable. It’s a fact that excessive levels of cadmium were found in rice grown in several areas, and the public had the right to be informed.

It’s true cadmium poisoning is not as dangerous as, say, cyanide. And contamination levels found so far have not been too much higher than the levels considered safe. But these arguments are outweighed by the widely recognized danger to human health posed by the accumulation of cadmium in the body. In fact, heavy metal poisoning tends to be chronic, and any clinical evidence may take years to surface.

Already, we’ve seen cases of heavily polluted rice fields in some areas of the Guangxi region and Hunan Province. Some villages in these areas have reported local citizens with symptoms of cadmium poisoning. Meanwhile, rice is still being grown in paddies laced with cadmium. It’s also being sold and eaten in those areas.

Thus, government inaction in the face of this toxic threat has – and continues to – put human health at risk. And the public should be made aware of the wider problem of heavy metals polluting the nation’s farms. Not only cadmium but also by other toxic metals such as lead, arsenic, mercury, copper and zinc may be tainting the nation’s rice as well as other crops.

China has given a lot of attention to food safety in recent years. But soil pollution is the greatest threat to the nation’s food safety. Even the government’s environmental protection authorities have conceded this fact. Up to 12 million tons of grain are estimated to be tainted by heavy metals every year, costing the economy more than 20 billion yuan. Human health is jeopardized as harmful substances from polluted soil make their way into crops and our bodies, causing disease.

All this heavy metal pollution has persisted due to prolonged government failure to act. Tackling soil pollution is difficult, but authorities should not use technical hurdles as an excuse to ignore the problem. Nor should they hide the truth or play down the problem for fear of public panic. Instead, government officials should take advantage of this new spike in interest to review their environment, farm and food management practices, and then take a holistic approach to tackling the problem. [More]

As you can tell from the above source (read the whole article) this event will be used to buttress the case against industrial agriculture and many modern farming techniques in favor of agrarian ag.  But you can't get much more agrarian than China right now.

What is suggests to me is we may be picking exactly the wrong time to decide we are victims of too much environmental regulation. All of our carping about the costs of compliance will seem pretty petty when confronted with a public that wants to know how we will prevent such a mess here in the US.

Chinese history you need to know...

Right now. I am finishing Mao's Great Famine by Frank Dikotter. It is an appalling account of the social and economic consequences on the insane "Great Leap Forward" in the late 1950's and early 1960's. It is not an easy read as the author painstaking documents absolutely horrendous accounts of starvation, stupidity, corruption, death on an imaginable scale, etc.  [I believe I have also recommended a much earlier book about that same event: Alive in a Bitter Sea.]

But this week's market action and these remarks by Kevin Van Trump prompted me to add to my speculation about China, food and the immediate future.

MUST READ...China's Years Of Pollution Could Actually Cost Them A Huge Portion Of Their Crop
China's poor farming practices and years of polluting their land may have finally caught up with them.  The news is just starting to surface, but from what I was told last night millions of acres of Chinese farmland could actually be polluted with heavy metals.  The Chinese government may have actually know of the problem since 2007, but have been able to keep a tight lid on things until now.  Sources claim that 12 million tons of grain may actually need to be destroyed or may have already been destroyed in the past few months.  The story circulating is that China had been pressed to build massive irrigations systems several years back to eliminate ongoing drought issues.  The land and water sources where the water was pulled from was later found to be highly polluted with heavy metals and other toxic substance.  The authorities, at all levels, have tried to hide the problem even though cases of pollution and pollution-related diseases, above all in children, have been breaking out like wildfire.  There have been documents uncovered that former Land Minister Sun Wensheng warned the government in 2007 that at least 10% of China's 295 million acres of farmland were actually contaminated by heavy metals, toxic pollutants, and cancer-causing cadmium.  Prime Minister Wen Jiabao and Environment Minister Zhou Shengxian were put on the spot and have promised to start some type of clean-up campaigns after admitting that metal poisoning had become much worse than they had ever anticipated.  Supposedly the Environment Ministry, yesterday announced on its website a plan to tackle pollution in 14 heavily affected provinces.  However, in typical Chinese political fashion it refused to provide any details about how much damage and how extensive the problem has become.  The plan and details of the problem are still being considered a national secret.  If this is true it could certainly be the "smoking gun" that China has been trying to cover up, and could ultimately let the cat out of the bag.  If it hasn't happened yet, I can almost guarantee you China's poor environmental practices will ultimately catch up with them.  

(Kevin doesn't offer any links to this, but I've e-mailed him for any source he can share.)

Anyway, match that up with these passages from MGF:

Mao's Great Famine (Frank Dikötter)
- Highlight Loc. 998-1005 | Added on Sunday, February 06, 2011, 10:27 PM

But most of the time buildings made of mud and straw were torn down to provide nutrients for the soil. Walls of buildings where animals had lived and especially where they had urinated, such as stables, could provide useful fertiliser. At first old walls and abandoned huts were destroyed, but as the campaign gained momentum entire rows of houses were systematically razed to the ground, the mud bricks shattered and strewn across the fields. In Macheng, nestled against the south of the Dabie mountain range in Hubei, thousands of houses were demolished to collect fertiliser. In January 1958 the model county was exalted by Wang Renzhong, party secretary of the province, for reaching a rice yield of six tonnes per hectare: ‘Let Us Learn from Macheng!’ the People’s Daily declared rapturously. Once it had been praised by Mao for its experimental plots, Macheng became a shrine.
==========
Mao's Great Famine (Frank Dikötter)
- Highlight Loc. 1005-14 | Added on Sunday, February 06, 2011, 10:28 PM

In the following months it attracted half a million cadres, including Zhou Enlai, foreign minister Chen Yi and Li Xiannian. By August a new record was achieved with a yield of 277 tonnes of rice per hectare: ‘The Era of Miracles!’ the propaganda machine proclaimed.18 On the ground the pressure was unremitting, wild boasts and false figures vying for attention. In one Macheng commune the head of the Women’s Federation took the lead by moving out of her house and allowing it to be turned into fertiliser: within two days 300 houses, fifty cattle pens and hundreds of chicken coops had been pulled down. By the end of the year some 50,000 buildings had been destroyed.19 Trying to outdo one another, other communes throughout the country followed suit. In Dashi, Guangdong, a commune that also attracted nationwide attention with its ‘Twenty-five-Tonne Grain University’ and ‘Five-Thousand-Kilo Field’, local cadres pulverised half of all houses in Xi’er.20 Other organic matter found its way into the fields: in parts of Jiangsu province, the land was covered in white sugar.
==========
Mao's Great Famine (Frank Dikötter)
- Highlight Loc. 3494-3506 | Added on Monday, February 21, 2011, 01:38 PM

Throughout the country the irrigation projects, built by hundreds of millions of farmers at great human and economic cost, were for the main part useless or downright dangerous. Many violated the laws of nature, resulting in soil erosion, landslides and river siltation. We saw how in Hunan, a province blessed with fertile soil, river valleys and terraced fields, lush mountains covered with primeval forest were defaced by local communes during the steel drive. The denuded mountains were washed bare by torrents, since there was no longer a canopy to intercept rainwater. As the capacity of forests to retain water was degraded, natural hazards were amplified into disasters. Large irrigation projects that had disrupted the natural flow of water with stopbanks, culverts, reservoirs and irrigation channels only aggravated matters. Accumulated deposits heightened the bed of local rivers in Hunan by up to 80 centimetres, so that water threatened to spill over and flood the neighbouring villages.39 Local reclamation projects made things worse. Launched by the state and local communes in response to food shortages, they showed little sense of stewardship of nature. In Hunan over 100,000 hectares were opened up, much of it on steep mountain slopes. The rain then flushed the soil and took it to the newly built reservoirs, choking them with sediment. One team in Longhui reclaimed ten hectares on a gradient against the mountain: the runoff from torrential rain in May 1962 took enough soil to silt up thirty dams and five roads.40

[BTW, these are what clippings look like when uploaded from a Kindle. The numbers are footnote numbers that lose formatting.]

For some reason I am fascinated by this period as it was a time when I was just beginning to be exposed to world events via The Weekly Reader. I remember reading about the GLF at the time, so I assume the Chinese did a masterful job of telling about the scope of their incredible and stupefyingly illogical programs.

Please also listen to my commentary on USFR this next week as I add in Hu's own biography (he's an engineer, for one thing) to my earlier remarks to guess what might be going through his mind right now. Also keep in mind he can remember the horror of the GLF firsthand.

Corner on cocoa!...

This title is lost on those who have never played "Pit", but maybe you've seen "Trading Places".  Anyhoo, somebody is choking the chocolate market. It turns out to be a guy named Tony Ward.

Big action in chocolate: Somebody bought almost all of the cocoa registered in European warehouses last week.
The buyer, according to the FT and the Telegraph, was a company called Armajaro, which runs several hedge funds and sells cocoa to the chocolate industry.
The purchase — 240,000 tons, worth about $1 billoin — amounts to about 7 percent of global annual production of cocoa. So it's not like the hedge fund can immediately turn around and control the global price of cocoa.
But if this year's cocoa harvest is weak, the buyer could have significant pricing power, Laurent Pipitone of the International Cocoa Organization told me today. [More]

I thought we had left those days behind us, but perhaps the staggering amounts of loose money wandering the globe like buffalo herd will cause more market-torturing excursions of volatility as frustrated investors look for a play.

Unfortunately, for Mr. Ward, when guys like me in farm country know about it, you usually lose.

However, Mr. Ward and company made a serious mistake by allowing word to leak about the operation. Rule #1 when it comes to market manipulation is secrecy. If rumors of your operations become known, the market will start to turn against you. Hedge funds in particular will start shorting cocoa because they know that if they can force heavy losses for Anthony Ward, at a certain point, he will be forced to sell his entire position for a steep loss. This will in turn cause cocoa prices to plummet as everyone tries to get out ahead of Ward and company. We might already be seeing this happen considering today's action in the cocoa market. Cocoa prices are down 5% as the market digests this recent news. It seems the market is going against Mr. Ward.  Will this end well for Mr. Ward? We don't know yet, but if history is any guide, it probably won't. [More]

Maybe the ol' Internet is the the best regulator of all.

[Thanks, Aaron]

Oh, snap!...

(FWIW, I'm trying to litter my conversation with up-to-date conversational aphorisms)

So economists at the Universities of [Areas of] Illinois produced a report for the OECD showing speculators were not guilty in the commodity 2008 markets, and that regulation would cripple their essentially beneficent presence in the marketplace.

Professors Scott Irwin, of the University of Illinois, and Dwight Sanders, of the University of Southern Illinois found the amount of money flowing into commodity index funds increased substantially in the period from 2006 to 2008. But although this increase represents a major structural change in investor participation in agricultural commodities futures, it has not increased price volatility, according to the study.

The paper said there is “no convincing evidence that positions held by index traders or swap dealers impact market returns.

“These results tilt the weight of the evidence even further in favour of the argument that index funds did not cause a bubble in commodity futures prices.” [More]

Then an economist bar brawl breaks out.

Last week, OECD published a report co-authored by two Illinois professors, Scot Irwin and Dwight Sanders. The report, entitled Speculation and Financial Fund Activity, purports to find statistical evidence that speculation played no role in generating the damaging volatility in food and energy prices witnessed during 2008-9. In fact, it claims that speculation by long-only index investors with no understanding of underlying supply and demand conditions actually helped reduce volatility, by providing liquidity.
The study and its findings can be disregarded for three reasons:

1. The statistical methods applied are completely inappropriate for the data used.
2. The study is contradicted by the findings of other studies that apply more appropriate statistical methods to the same data
3. The overall analysis is superficial and easily refuted by looking at some basic facts. [More]

[Note: This is the economist equivalent of "Yo Mama!".]

But without trivializing further, it does strain credulity to suggest the immense wealth pouring into our relatively small markets did not distort the price-determining function.  The comment about the price of oil is telling, IMHO.

Worse by far is the idea that this study, even if flawed will be used as criticism against derivative market regulation which has widely been considered lacking.  Overall, it appears nobody know what the new regulations will mean to farmers.

The question for these farmers is whether such rules will make hedging more expensive. Some say new requirements on big players will create higher costs for small players, including the cash dealers will have to put aside to enter into private derivatives transactions. Some brokers think restrictions on big-money banks and investors will drain the amount of money available to the everyday deals farmers favor.
Others predict the opposite effect, pushing money from the private market to the exchanges and creating more competition that will benefit farmers. [More]

This account as well is open to valid criticism. 

It gets worse. For all the apparent handwringing about farmers and feedlots, the story then slips in this show-stopper:  "Faced with intense lobbying, Congress partially exempted businesses that use derivatives for commercial purposes. So, farmers and co-ops probably won't face new collateral requirements."

Say what?  Farmers and other end-users are exempt from the new rules?  Then why are we being subjected to this article?

The truth is that the only players who most certainly stand to lose are the big banks, like JP Morgan Chase and Goldman Sachs, that will have to either spin off their derivatives-trading operations or put them into separate subsidiaries that require higher capitalization.  [More]

 But here is my beef. If the criteria for good regulation is lower transaction costs for farmers, why not simply state that as the primary goal?  If it is for efficient markets, maybe it should cost more.

God knows, we've paid plenty for CDOs and other derivatives.

(I'll try to follow this contretemps and see if any light is shed)

What was that in the cornfield?...

A black swan?  Several individual events recently combined to make me wonder if we could have a real, live production problem this year.  As one (or more) of our USFR market wizards likes to say: we always kill the crop 2-3 times before harvest.  But mix theses datapoints together and see if you don't ponder the possibility.

1. I drove to Chicago for a meeting yesterday - pretty much straight through central IL on Rte 49 and I-57. I have been discouraged about the recent yellowing in my low spots - even for 4' corn, but I was blown away by how poor the crop looked between here and there.  Once I left I-74, less than 5% of the corn fields looked OK (yeah - I did some actually counting).  There were many fields where I had to look for green spots.  Huge ponds and 27 unplanted bean (?) fields bordering Rte 49.  I had driven this same route about 3 weeks ago and just noted they were 10 days or so behind us here in Edgar County.
2. Checked the rainfall totals from just yesterday in IA and N IL.  Checked the Crop Comments.  Even after fudging for the only-the-bad-news bias in CC, the rainfall numbers are staggering.  One big diff from 2009: NE has been clobbered.  Last year it was the garden.
3. Accuweather meteorologist Joe Bastardi issued his summer forecast update.*
4. Darrel Good quietly points out how even a big crop will get used up at the rate we're going.
5. Jerry Gulke (I met in his office yesterday) suspects China could have their own production problems and with the new, heftier yuan could gobble several million bushels more of corn to feed their growing protein industry.

The idea of a short crop simply won't fit in most of our heads.  Fool me once, yadda, yadda...  But the idea that the vast majority of the Corn Belt can't have a simultaneous yield problems strikes me as the same assumption the housing industry made about house prices: they couldn't drop everywhere at once. Only they did.

I am pretty much useless offering marketing advice, but I think I see more glimpses of a black swan event in 2010 than last year.  Now imagine what would happen to our livestock, ethanol, and foreign customers if we show up with a sub-12B bu. crop.

*Summer has officially begun and AccuWeather.com Chief Long-Range Meteorologist Joe Bastardi is calling for more scorching temperatures to occur over much of the nation through August.
Average summer temperatures will rival some of the hottest summers ever recorded across the eastern half of the nation.
"It's possible for record-breaking warmth in the first half of July for much of the nation," said Bastardi.
Between I-80 and I-20 from the Rockies eastward, temperatures will hold between the mid-80s and low 90s F through mid-July.
Humidity and uncomfortable heat will also cover the Great Lakes and much of the Northeast, and south from I-20 to the Gulf Coast through the same period. Temperatures will be slightly above normal, lingering around the low 80s in the Northeast and in the 90s across the south.  [More]

Meanwhile, the bean fields look like excrement, essentially.


I'm just sayin'

More black swan stuff...

My commentary this week is about black swans, and as luck would have it, they have just wandered onto the baseball diamond.

The most inexplicable fact about perfect games is that, over the past generation, they have been happening more often. In the 100 years through 1980, there were nine perfect games, less than one per decade. Since then, pitchers have thrown 11 more, better than one every third year. Perfect games were once black swans, as infrequent as severe financial panics. Now they are becoming commonplace.
Changing Dynamics
Come to think of it, the same is true of financial crises. Have we, in either arena, merely experienced a spate of bizarre luck -- an unusual drawing from nature’s urn? Or have the internal dynamics of the games changed, so that once-unlikely results will be the norm? Perhaps the modern ballplayer, built for power more than contact, is less able to squeeze out a late- inning hit when needed. Perhaps financial institutions are so conditioned to depend on the market’s judgment -- or on the government’s willingness to prop it up that -- when either fails, they have less room for error, more propensity to panic.
Our financial architecture is based on our supposed ability to forecast; every time an investor speaks of risk-weighted returns, he or she presupposes knowledge of what the risks really are. The odds against 27 straight outs are no longer what they were; what of the odds of a run of bad financial luck? Those who mechanically rely on a historical pattern take the biggest risk of all. [More]

How this all impacts my farm decisions still is unclear. One thing I do know: increased volatility is exhausting. At least at my age.

Which leads me to the suspicion many of us Boomers will look at land prices, machinery prices, and rents and see an exit strategy.

[Update:  Due to a technical glitch the wrong commentary was run this weekend. The "Black Swan" will air later (probably July)]

The spill could wash up farther...

Than we think.  I have been waiting for the fog of confusion to lift before commenting on the BP disaster. While not wanting to seem callous, many of us watched the Katrina catastrophe unfold with detached horror, since it really only affected folks in LA and, of course, Washington, D.C. It is easy to do so again as a largely unseen problem grows under the surface of the Gulf of Mexico.

But regardless of how pronounced the damage is to the coastline of the Gulf states, I could see a bigger problem as the ecology of an enormous amount of ocean is possibly devastated. I fully credit the efforts by both BP and the government to tackle this nightmare a mile down. [ For detailed explanations by experts about how BP is attacking the problem you can't do better than the Oil Drum]

Nonetheless, here are some ways BP could leak onto my farm:

1. Re-animating (and complicating) the "Dead Zone" controversy.

As oil continues to gush into the Gulf of Mexico, a "dead zone" is also having its annual growth spurt. It's not clear how these two complex systems will interact, but scientists are sampling the water for clues.

Fertilizer and urban runoff into the Mississippi River dump nutrients into the Gulf of Mexico. In the spring, higher flows contribute a pulse of nutrients that triggers huge blooms of algae. When the algae dies and sinks to the sea floor, it is consumed by bacteria that guzzle oxygen from the water. If oxygen levels drop too low, shrimp, fish, and other sea life must flee or die, leaving a dead zone that sometimes grows to the size of the state of New Jersey.

According to satellite images, the oil slick overlaps one of the areas where hypoxic zones typically form. The possibilities for what that means are myriad and contradictory.

Some factors might worsen the dead zone. The oil's sheen could prevent oxygen from entering the water, lowering oxygen levels in surface water at a time of year when surface and deeper waters are already stratified. Another negative mechanism: Microdroplets of oil dispersed in the water might set off a feeding frenzy of microbes able to dine on the hydrocarbons, further reducing oxygen levels.

Alternately, the oil could lessen the severity of the dead zone. Oil reflects light, which is needed by the photosynthetic phytoplankton. And toxins in the oil could also diminish the phytoplankton blooms. Both factors could potentially mean fewer dead phytoplankton reaching the bottom, leading eventually to less oxygen depletion. [More]

I'm not trying to be pessimistic, but hoping for two bad things to cancel each other out seems far-fetched to me. What will be more likely is the liability mining is already underway, as everyone from Gulf tourist businesses to environmental groups flood the courts with actions to recover damages.

While they do so they will be funding, along with the government, plenty of new research into the health of the Gulf, and I for one do not think the reports will be happy talk.  In the effort to begin to recover from this disaster, it will be very easy to attach new limits on the runoff issues associated with the previous Dead Zone.

For Midwestern producers this means the possibility of new regulations on fertilizer amounts and  applications.  Erosion will come under even more scrutiny.  In short, the complaints we have stymied to a vague standoff will suddenly be attached to a juggernaut, IMHO.

So first possible consequence: stronger fertilizer regulation in the Mississippi watershed.

     2.  Carbon taxes. 

There is growing awareness that our fiscal problems cannot be solved by the Tax Cut Fairy, and will require new government revenue.  If you don't believe this, send me your list of budget cuts to attack the problem.  Carbon taxes have been my choice, but have fallen into disfavor even though they represent progress on two fronts - energy and debt.

The BP spill has breathed new life into examining the problems of basing so much of our economy on energy sources which do not fully price in the externalities of their environmental impact.  Carbon taxes are a suitable way to do this. 

As legislators run out of ways to avoid addressing the budget deficit, taxing a now VERY problematic energy source to at least recover some of the unpaid costs of their use (and this debacle) could gain momentum.  This would be good for ethanol curiously, but bad for farmers who imagined their political clout would gain them checks for questionable carbon-sequestering benefits.

Because much of the ag carbon footprint is from fertilizer, another tourniquet could be applied to our voracious intake of NPK. 

Second impact:  carbon taxes raising costs considerably.

   3.  NOLA shipping.

The slick has forced the shutdown of the gulf's rich fishing grounds and could also spread to the busy shipping lanes at the mouth of the Mississippi River, tying up the cargo vessels that move millions of tons of fruit, rubber, grain, steel and other commodities and raw materials in and out of the nation's interior.
Though a total shutdown of the shipping lanes is unlikely, there could be long delays if vessels are forced to wait to have their oil-coated hulls power-washed to avoid contaminating the Mississippi.
Some cargo ships might choose to unload somewhere else in the U.S. That could drive up costs.
"Let's say it gets real bad. It gets blocked off and they don't let anything in. They lose time, and they are very concerned about that," said river pilot Michael Lorino. "It's going to be very costly if they have to unload that cargo in another port and ship it back here because it was destined for here."
When a tanker and a tugboat collided near New Orleans two years ago, oil cascaded down the river and some 200 ships stacked up, unable to move for several days while the Coast Guard had the vessels scrubbed. Millions of dollars were lost. [More]

 Third impact: basis turmoil as my markets shift due to transportation cost volatility.

   4.   Big government.

As Republicans smell blood/oil  in the water, they could inadvertently, or very cynically, about-face on the role of government.  Blaming Pres. Obama for not doing enough is hardly a Tea-Party call for smaller, less intrusive government.  Consider one GOP critic of government who has radically changed his tune.

Ben Brooks, a lawyer and Republican state senator from coastal Alabama, says he's no fan of big government but he expects an aggressive federal response as a gunky oil spill threatens the Gulf of Mexico.
"There's nothing inherently contradictory in saying we believe in smaller government and demanding that the government protect public safety," Brooks said.
All along the Gulf Coast, where the tea party thrives and "socialism" is a common description for any government program, conservatives who usually denounce federal activism suddenly are clamoring for it.
Take Louisiana Gov. Bobby Jindal, a Republican elected in 2007 when Democrat Kathleen Blanco opted not to seek re-election after she was widely panned for a bumbling response to Hurricane Katrina two years earlier.
Since April 20, when a gulf rig exploded and blew out an underwater oil well about 50 miles south of Louisiana, Jindal has been a constant presence in the fishing communities and barrier islands along his state's fragile coastline. He's been out on boats and up in Black Hawk helicopters, doors open, to survey the spreading, rust-colored swath of crude.
Gov. Bobby Jindal looks at oil that got past booms on May 21 as he tours a land bridge built by the Louisiana National Guard to hold back oil in Grand Isle.Jindal, a possible 2012 presidential candidate, has demanded a stronger response from the Obama administration, accusing the U.S. Army Corps of Engineers of dragging its feet in approving Louisiana's plans for protective berms -- a plan that took three weeks to approve.
"This oil threatens not only our coast and our wetlands, this oil fundamentally threatens our way of life in southeastern Louisiana," Jindal said last week.
Jindal is a fiscal conservative who made headlines last year by rejecting some federal stimulus money, then distributing other stimulus funds by handing out oversized cardboard checks to local officials.
Louisiana State University political science professor Kirby Goidel said Jindal's call for larger federal involvement in the oil spill management contradicts the governor's usual persona.
"He's governor largely because of Katrina," Goidel said. "He knows that it's important to get out on top of it and be clear if the federal government is not doing what it's supposed to do. It's important for people to know that." [More]

My rule of thumb is modern "conservatives" are staunch opponents of government action that doesn't benefit them. I expect to see more such criticism of the "inadequate" federal response regardless of the budget or expansion of federal responsibility.


Fourth Impact: expansion of the scope of federal responsibility for private mistakes (similar to Wall Street)

This is not, of course, an exhaustive list of possible outcomes, but it gives me some targets to watch.  If forced to bottom line this for my farm, it would be less optimistic medium term for grain prices than I have been.  And more profoundly determined to lower our costs and energy use than ever.

Not thunderously brilliant, I know.  But surprisingly defensive for me.

Meanwhile, back at the African ranch...

While we can't take our eyes off China, except maybe to glance at India, something is happening in Africa.  Something very good, I think.

[More]

The cause is anybody's guess, but China's hunt for commodities (especially metals/minerals) is a top candidate. I think we need to keep in mind that growing demand for commodities does not guarantee that demand will show up here alone, or even mostly.

 Obviously the question becomes how sustainable this boom is. Traditionally the problem for countries that are commodity-exporting their way to prosperity is two-fold. One is that your commodity exports drive up the price of your currency, which reduces the competitiveness of your industries in other tradable sectors. You become a country that sells copper (say) abroad to finance imports of all other kinds of things. Second is that while in the initial phase rising commodity prices make your country more prosperous and in the second phase continued price growth drives investment that further drives prosperity, sooner-or-later the increase in investment tends to drive the price of the commodity back down to earth and then where are you? So what you’ve normally seen is countries riding a commodity price boom-bust whipsaw and never achieving any kind of sustainable development. Will we see that again, or will China manage to keep moving up the value chain to the extent that eventually Africa and other poor places start to take its place as low-cost manufacturing hubs and so forth? [More]

Still, because we grow commodities that flow like water through the markets, demand anywhere is a good thing. And what this chart suggests is Africa could begin contributing mightily to that demand as GDP soars.

Thursday fallout, Cont'd...


More analysis of the strange day on the NYSE prompts this interesting idea for mitigating future problems: no market orders.

But there are other ideas to keeping computerized markets in check. Lawrence E. Harris, a finance professor at the University of Southern California, said regulators should simply require all sellers to specify a minimum price below which they do not want to complete the sale of their shares. Market orders, placed at the best available price, can be too risky in the fast-moving age of electronic trading.

On Thursday, some sellers placed orders that were not fulfilled until prices had plunged as low as a penny a share. If sellers had placed “limit orders” instead, those transactions would not have happened, Professor Harris said.

“Electronic exchanges in most other countries only accept limit orders,” said Professor Harris, a former S.E.C. chief economist. “Without any mechanisms to stop the market, we just had stocks falling through the ice.”

But Rafi Reguer, a spokesman for the electronic exchange Direct Edge, said retail investors liked market orders because limit orders could be rejected, forcing the seller to try again, in some cases at a lower price.

“Sometimes what people value is the certainty of execution,” Mr. Reguer said.

Experts also note that the value of limit orders can be subverted if investors routinely set unrealistically low limits, to avoid the inconvenience of having their orders rejected. [More]

I find it hard to believe there won't be some tinkering with the trading systems which will spill over to our world.

Do we know what happened Thursday?...

The lightning drop and rebound in the DJIA still boggles the mind in retrospect.  Jeez- just look at it:

[Source]

For the most part we're getting lists of possible causes, although market watchers are starting to center in on high frequency trading (HFT).

In principle, more trading and faster trading should be a good thing, making markets more liquid, allowing them to react to new information more quickly, etc. The problem is that the way trading has gotten quicker is by relying more and more on computers, which in turn means that many (perhaps most) trades are based not on fundamentals—which is what you want investors to be looking at—but on price movements. In normal times, this doesn’t matter much—the price movements are reasonably random and therefore the computerized trading doesn’t move the market in one direction or the other. But when things go wrong, you can get immense moves up or down. That’s why, in contrast to Felix Salmon, I don’t think yesterday’s crash is evidence the market is irrational. It’s more that it’s a-rational: the computers aren’t panicking or herding. They’re just following simple rules. I think this is bad for the collective intelligence of the market, which really depends on diversity of thought and independence of action. But what happened yesterday isn’t, I think, quite the same as the crash of 1929 or the stock-market bubble of the late nineteen-nineties. It’s an example of the dangers of a-rationality (to coin a word) rather than irrationality.[More]

Another contributor could be fragmentation of the market, which is better explained by somebody who knows something about it. The best graphic I found is here.

More remarkable to me than the composite drop in the DJ Index was the performance of some individual stocks:

[Source]
So just imagine you had an order in place to buy Excelon at $1. The price briefly hit ZERO, so if your computer was fast enough, you could make the fastest 40X since Jesse James.  I don't know if this was actually possible - especially since some trades were canceled - but I wonder if these gyrations have prompted a bunch of waaaaaay-below-market orders to be entered in case another transient occurs.

Perversely much of the efficiency of the market also provides its fragility. We may be pushing the point where the benefits of having money whiz around the globe is offset by the growing risk of events that were formerly much less likely.

Exchange officials are still trying to puzzle out what exactly happened to cause the price of dozens of stocks to suddenly plummet by more than 60%. But it seems likely that it has something to do with the new infrastructure of high-frequency trading that now accounts for the bulk of stock market activity.

To function well, stock exchanges need market makers — that is, firms that are willing to keep buying and selling in a particular stock at all times. On the New York Stock Exchange these are the "specialists" (who are now kept around mainly as backdrop for CNBC reporters). On Nasdaq they are simply called market makers. They make money off the difference between what they bought and sold a stock for (the spread). Over the past decade, though, spreads have shrunk as traditional market makers have been pushed aside by high-frequency trading firms that take advantage of millisecond-by-millisecond price changes and the tiny premiums that exchanges pay to "liquidity providers" (a.k.a. market makers) to make money even at infinitesimal spreads.

At one level this is much more efficient than the old system. The spreads are smaller, so investors are getting a better deal, right? Well, not if the system also becomes much more fragile, and susceptible to sudden collapses. Over the past three decades our financial system has become vastly more complex in terms of technology and diversity of available financial products. By some measures it has become more efficient — trading commissions have certainly come down. But it has also become more prone to crisis and (maybe) collapse. Efficiency (and this is an argument borrowed from Taleb) breeds fragility. [More]

But strangely enough, the bond market hung in there - and that has some powerful reassurance for increasingly impatient inflation worriers.

You probably know the bad news already. Stocks on Thursday dropped 600 points in 15 minutes in mid-afternoon. The market went down nearly 1000 points before rebounding. That's the worst mid-day drop in the Dow Jones industrial average EVER. So really bad stuff. But here's the good news: Bond prices were up. During the hysteria, the yield on the 10-year Treasury Bond, which falls as prices rise, dropped to 3.25%. The 2-year US bond went down to as low as 0.60%. That's really good news. Here's why:

Bond yields, among other things, are a function of how likely it is that investors think you are going to default, or not pay them back. That's why a subprime borrow pays more on his home loan than someone with a high credit score. The same is true for countries. So the fact that bond prices in US fell when the stock market fell means that at least so far the global economic problems have not impacted how risky people think the overall US economic system is. Confidence, that all important economic currency, is still something we trade in. That's good. [More]

Other than curiosity, does this Wall Street hiccup merit any attention from those of us invested largely in commodities? I think so.

First, we have dealt another blow to investor confidence in the equity markets. Folks weren't jumping into bonds because they wanted to make big bucks, they were fleeing risk. The fact the cause has not been definitely identified and preventative measures outlined is not calming either. Scared money needs more risk premium. So one possible result could be higher priced derivatives, and I think that could flow over into commodity options - the current rage for farm marketing mavens.

Frankly, I think commodity options in general are too expensive now. Either contagious risk-aversion or added demand from new investors could raise the cost for producers to "protect" their crop to the point the protection captures much if not all the profit.

Second, many think this little roller-coaster ride added momentum to financial regulation.  I support most of the measures in the bill under debate, but understand clearly regulation is an economic deadweight, which will again raise the cost of marketing - even if we simply sell cash contracts by raising hedging costs for our trading partners.

Finally, this mini-debacle could see a new tax regime on trading- especially HFT - both to act as a brake, and to raise some badly needed new revenue for the government.

There’s a very sensible idea going around that a simple way to deal with nearly all of these problems, at a single stroke, would be to implement a tiny tax on financial transactions. Historically, people have complained that such a tax harms liquidity, which is true. But the fact is that it harms the bad kind of liquidity — the liquidity which dries up to zero just when you need it most. Liquidity, if it’s spread across multiple electronic exchanges and can disappear in a microsecond, does very little actual good, and in fact does harm during tail events like this. Let’s tax it, and raise some money for the public fisc at the same time as slowing down markets and making them think before doing a trade. [More]

Since I am convinced we have to raise revenues (taxes) to attack the deficit, this looks like a win-win idea to me. 

Most surprising to many of us, our commodity markets didn't overreact.  Either all those linkages to Wall Street, oil, and the dollar are suddenly weakening, or maybe there really are some fundamentals lurking in the bushes that prove more demand than we think.  It's worth considering.

So, all in all, for farmers this was a more interesting event than we may suspect.  Depending on its half-life, I think it is good news for both prices and interest rates.