Apocalypse Now: USD1.6 Trillion in Losses and Counting
It seems that with each passing month the estimates for losses in the international banking system keep rising. This time last summer the largest estimates (from credible sources), if memory serves me correct, were around $400 billion, give or take a few months. By the end of the year it was in the neighbourhood of twice that. Then last quarter we saw estimates approaching $1 trillion. Last week, the number being broached was $1.6 trillion, by Bridgewater Associates, one of the top, and more credible, analytical firms in the world.
Telegraph -- Bridgewater Associates has issued an apocalyptic warning to clients that bank losses from the worldwide credit crisis may reach $1,600bn [$1.6 trillion], four times official estimates and enough to pose a grave risk to the financial system.
The giant US hedge fund said that it doubted whether lenders would be able to shoulder the full losses, disguised until now by 'mark-to-model' methods of valuing structured credit.
'We are facing an avalanche of bad assets. We have big doubts as to whether financial institutions will be able to obtain enough new capital to cover their losses. The credit crisis is going to get worse,' said the group in a confidential report, leaked to the Swiss newspaper Sonntags Zeitung.
Bank losses on this scale would have far-reaching effects. Lenders would have to curtail loans by roughly 10-to-one to preserve their capital ratios. This would imply a further contraction of credit by up to $12,000bn [$12 trillion] worldwide unless banks could raise fresh capital.
The week ahead in agriculture
Weather outlooks this week. The monthly long-range forecast updates come out Thursday next week, and that will provide a look at what the weather picture looks like as we head into key times in the corn and soybean growing seasons. The outlooks for August and August-October will be out Thursday morning.
Crop Progress updates. After the slight uptick in corn and soybean crop ratings this week, and weather that traders viewed as crop friendly, expectations will be for even more improvement in those condition marks when the data comes out Monday morning. The figures will reflect conditions as of July 13.
Hearings on markets. This week will continue the focus on efforts by lawmakers to put limits or change rules in trading of commodities. The Commodity Futures Trading Commission has been under fire for the situation, but maintain they need more staff to be able to adequately assess the situation.
CRP court date. There will be a hearing July 17 in U.S. District Court on the injunction granted that halted activity on Conservation Reserve Program (CRP) haying and grazing efforts. USDA will no doubt defend the effort strongly as it seeks to restore the effort they announced in May.
Lloyds Animal Feeds Fined
(Market Drayton Advertiser) -- Lloyds Animal Feeds has been fined after admitting failure to comply with an abatement order.
Campaigners have secured an important victory over a poultry farm near Stoke Heath, who they blame for a plague of flies in the village, reports Market Drayton Advertiser.
Lloyds Animal Feeds, which is based in Oswestry, was fined £7,000 and ordered to pay more than £10,000 costs after admitting failure to comply with a district council abatement order.
Complaints began in 2005 and were investigated by environmental health officers. As a result, North Shropshire District Council served the abatement order in August 2006 on Lloyds, which has an egg production plant in Stoke Heath.
Further complaints were received from local residents in April last year, and legal action was launched following another investigation.
Evidence of a top in corn/soybeans?
Pro Ag -- On the market side this week we have seen the first evidence of a top in corn/bean markets (the wheat ship sailed in February!), with soybeans dropping $1.50 in 48 hours and corn dropping $.75. We have recovered from the worst losses so far this week, but it certainly opens up a whole new realm of possibilities in a marketplace that the past 22 months only included "up" in the list of possibilities. If we can drop $1.50 soybeans and .75 corn in just 2 days, can we drop $5 soybeans and $3 corn by harvest? After all, there is at least 40 days of trading in soybeans until harvest, and 60-80 days of trading for corn into harvest. We'd need to average a 10c loss in soybeans/day and only a 5c loss in corn to make these potential lows of $4.5-$5 corn and $10 soybeans this fall.
While these numbers seem shockingly low compared to current $7-$7.50 corn and $15-$16 soybeans, these are still profitable levels for production of both in the US this year - even with a sharp hike in production input costs.
Now there is a reason prices hit $8 corn and $16.50 soybeans - the grain S/D is remarkably bullish. Pro Ag is NOT in the camp of those who think prices will return to $2 corn and $5 soybeans - instead we think corn will trade $4-$7 and soybeans $10-$15 the next 2-5 years. This will leave agriculture VERY profitable the next 2-5 years, but the difference between profitability at $7 corn vs. $4 corn is a huge difference! Pro Ag would prefer to be on the high end of these sales levels - therefore our aggressive sales campaign lately since we got above $6 corn and $15 soybeans. These have been our multi-year (and even multi- decade) price targets since this rally began, and its time to now lock in at least some of these levels while we can. (NOTE: 2008 was there, but also 2009 and 2010 new crop the past few weeks. Add 2011 soybeans recently at the $14.50-15 level!).
All this at a time when most buyers won't give you a bid beyond 6 months. There is a reason buyers are willing to pay that much 3 years out, and its because they find no willing sellers anymore. That's the perfect time to do what my wise father called "walking when everyone ran, and running when everyone walked". Pro Ag thinks its time to lock up these multi-year hedges at ungodly profitability levels - and let the cards fall where they may. If we have capital to hold these hedges (and any bank should provide it), we can't see what could derail us as we don't even need a viable (read this as non-bankrupt grain buyer) outlet for this grain as we are doing our OWN hedging now. And the beauty of that is IF corn drops $3 and soybeans $5 the next 2-4 months, we can remove these hedges and use all that capital from our hedges (note this is the opposite situation of margin calls!!!) the next few years instead of letting our buyers have it all. Which reminds me of another of my father's wise sayings: "When the cookie plate comes around in business, don't be afraid to take two!"
Roy Smith: "this weather is just what we need for perfect crop development"
Roy Smith is a well-known Nebraska corn farmer:
The weather today at my farm is typical for a July day in eastern Nebraska. The temperature is around 90 degrees and rising. The humidity takes your breath away. The forecast is for the top to be around 94 degrees this afternoon. I promised to mow the yard this afternoon. Right now spending time at the computer in my air-conditioned office seems like a better idea.
I know that some areas are already getting dry after some torrential June rains. I know that other places are still hoping to dry out. At my place, this weather is just what we need for perfect crop development. We had an inch and a quarter of rain on Monday and Tuesday. I would like to say it was nice gentle precipitation, but unfortunately the rain Tuesday came as hard as I have ever seen. I am glad it did not last very long.
The change in appearance of the crops amazes me. In a week's time corn which was yellow from too much water has turned a dark green as the roots reached deep nitrogen. Soybeans that were planted earliest and in 15 inch rows now shade the space between rows. Traders in Chicago who drove into the countryside over the July 4 weekend obviously saw the improvement in conditions when they returned to the trading floor on Monday.
As I mentioned last week, it is common to see a change in trend following the Independence Day holiday. That certainly happened this year in the corn market. It makes the sale of cash corn I did on June 27 look very good. What a relief to have the bins empty and not be faced with cleaning them out during this heat and humidity.
Looking at the government reports from last week and this week, it seems as if price action is not following logical path. One of the sayings on my Murphy's Laws poster says. "The market is not logical, it is psychological." I should quit trying to calculate the fundamental factors and just go with the trend. Long term seasonal charts show a down trend in the corn market from late June through the end of September. I doubt that prices this year can go down that long without at least one rebound. However, with prices where they are and the appearance of the crop continuing to improve, odds are good prices will be lower at harvest than now.
Soybeans this week have taken a different direction. Carry over is certainly low enough to justify price strength. However, with futures over $15, some weakness before harvest is easy to rationalize. Long term charts show prices trending down now, but recovering in August and early September. We need to keep in mind the possibility of Asian Rust developing with this humid weather. If that happens, all bets are off. Meanwhile enjoy the contra seasonal price strength and hope that if the rust comes it will be too late to damage yields.
Friday CBOT Closing Comments: Corn
Corn stopped the rot closing around 4-6c higher despite a bearish slant to the USDA numbers.
For corn, the USDA estimated the U.S. 2007-08 carryout at 1.598 billion bushels, vs. its June estimate of 1.433 billion bushels, and the average trade estimate of 1.514 billion. For 2008-09, the USDA's corn carryout is pegged at 833 million bushels, vs. its June estimate of 673 million bushels, and the average trade estimate of 820 million bushels.
Almost as soon as it had been issued, the report was being dismissed as minor in comparison to the Aug 12 report which will more accurately reflect the impact of the recent Midwest flooding.
On the week as a whole cash US corn prices dropped a pretty steep 65 cents.
The last of nearly a dozen flooded navigational locks on the middle Mississippi River reopened to commercial traffic July 6, permitting a resumption of grain barge traffic to New Orleans-area export terminals.
Friday CBOT Closing Comments: Soybeans
Beans actually behaved pretty predictably for once. Nearby July closed 21c higher, with gains gradually diminishing as we go further forward into new-crop months which posted gains of 6-9c.
The USDA report came in pretty much bang on the button of expectations forecasting 2008-09 U.S. soybean ending stocks at 140 million bushels, compared to 175 million in June and the average analyst estimate of 139 million. The USDA pegged 2007-08 soybean stocks at 125 million, unchanged from June. The average of analysts' pre-report estimates was 123 million.
A choppy session saw new-crop Nov fluctuate between 24c down and 33c up, before deciding to meet in the middle and settle 9c firmer.
The nears supported by the tight balance sheet and the prospect of a pick up of exports if & when the Argy farmers eject their toys from the perambulator (again).
The Midwest weather looks non-threatening at the moment, but there will undoubtedly be weather scares ahead in August (too hot/dry) and beyond (too cold/early frost). I'll still take prices to work lower once the crop is in come October.
On the week as a whole a 33 1/2-cent drop in CBOT August futures also took the value of soybeans in U.S. storage off recent record highs.
Friday CBOT Closing Comments: Wheat
Wheat finished around 12c higher on what is being called "short-covering and technical buying" despite a neutral/bearish USDA report.
The USDA estimated 2008-09 U.S. wheat carryout at 537 million bushels, compared to the average analyst estimate of 538 million and the agency's June estimate of 306 million. The government's projection for all winter wheat production of 1.864 billion bushels was above the average analyst estimate of 1.852 billion.
The US is still in the middle of harvesting winter wheat and things are looking pretty good. The chances are that the 1.864 billion production number will get bigger as time goes on.
"Combines are in northern Kansas, finding much better-quality (HRW) wheat,along with yields that continue to impress. Even northwest Kansas, which was still in the drought region, has seen areas of 40-60-bushel yields, proteins understandably high in the 12-16% range, and (test) weights also impressive, of up to 64 pounds (per bushel)," said Spectrum Commodities analyst Louise Gartner.
The USDA also upped its Australian 2008 crop estimate 1mmt, and pegged the world crop higher than last months as well.
All this, yet the market closes higher, a further indication that the futures markets are becoming further divorced from the reality of the cash markets? It would seem so as CIF HRW wheat basis reportedly fell 4-10c last week and HRS basis fell 25 cents.
Still on the week as a whole seasonal harvest pressure and weak export demand eroded cash winter/spring wheat prices this week, slashing spot HRW/HRS/SRW futures by about 38-57 cents.
Certainly the US aren't going to find themselves awash with export interest now that the combines are rolling in the Black Sea regions. Sure, they will pick up their usual orders from South Korea, Japan and the like but any interest from the likes of Egypt and Pakistan will be eagerly mopped up by Russia and the Ukraine.
