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One thing I’m not covering a lot these days is the hog industry crisis.
That’s because profitability has returned to the industry and those who are left in it are busily rebuilding their balance sheets and getting used to the almost-forgotten feeling of being able to focus on production and pigs rather than on banks and government bailout programs.
Good news brings quiet, and these charts show some good news:
October Chicago lean hogs futures
December lean hogs
May lean hogs
In case you can’t see those numbers on the right side of the chart, the market today is predicting October lean hogs are worth $76.58, December is $74.13 and May 2011 is $81.25.
The slight drop into December is relatively nice, because the fourth quarter every year is the time of peril, of collapses, of slumps. If prices subside only a couple of bucks – which is what the collective wisdom of the market is saying it expects – then that will be the nicest fourth quarter you could reasonably ever expect. And $81 hogs next summer is the kind of nice prospect that keeps people going through these darkening days of September.
I’m delighted to see profits return to the hog industry and the savaged survivors getting a chance to rebuild. The industry across Canada has shrunk, and in Manitoba there are still a lot of messes out in the country, but I’m one of those people who thinks the prairie hog industry has a golden future, so this return to profits makes sense to me. I’m also an extremely risk averse person, so I think producers should be protecting these prices through commercial contracts, futures or – my perennial favourite – options. I hope the producers who survived the recently ended downturn remember how many of them nearly got busted out of the business because they didn’t protect profitable prices when they had the chance.
But with that little lecture aside, let me wax on a little bit about why I think the hog industry on the prairies has a golden future. Actually, let me illustrate the point by showing you a badly-taken photo I took when I was down at the World Pork Expo in Des Moines, Iowa, this past June:
Comparative costs of producing pork
This slide was put up by Iowa State University economist Dermot Hayes to demonstrate why he thinks the U.S., Brazil and Canada have a long time competitive advantage in hog and pork production compared to other major world producers. You probably can’t see the numbers, but this shows the U.S., Brazil and Canada (the three bars on the left) producing pork for $50-60 US (liveweight cwt), while European biggie Denmark needs $70 to cover costs, the EU in general needs $80 to break even, and Chinese producers need slightly over $80. South Korea, which is easing itself out of a protected domestic market, can only produce pork for about $110.
That’s a huge advantage for we North Americans and the Brazilians – let’s hear it for the Americas!!!!! – and tells me that as long as international trade doesn’t fall off a cliff, and people keep eating pork, we’ll continue to be the world’s most important export pork producers until long into the future. China’s hog industry is industrializing, which could reduce its costs, but the country is also running out of land and water, and pork production intensification seems like something the Chinese might not be able to push too far.
I can’t think of anywhere else on Planet Earth that’s better suited – economically and environmentally – for hog production than here, so whatever catastrophes strike us – like the recent one – we’re likely to keep limping through and coming out the other side comparatively stronger.
But it might be a quite different looking industry a few years from now. There is lots of pressure for hog producers to move from sow stall systems to open housing systems, so the barns of the future may end up looking a lot different to those of today. And water and manure regulations may force barns out of some areas and into others.
But that’s the sort of change a progressive industry can handle. This morning I was out at the University of Manitoba meeting with senior researchers in hog production and barn design. Right now there’s a major effort to develop an understanding of how alternative, open-stalled, solid-floored systems could work here in the cold north. Within a few years we should have lots of knowledge to rely on when producers either choose to, or are forced to, adopt different production methods. Refreshingly, the research is all being tied together to form a whole, including profitability, so this is real-world research that real producers will be able to use.
So while we’ve survived the crisis, and things have gone quiet while people are rebuilding, there’s steady, diligent work going on under the surface that should give us the foundation for a leading industry that will live far into the future. The darkness of the crisis made many question whether the industry would have a future here, but if you look back at that badly-taken picture I have up above, with a competitive cost advantage like that above, it’s hard to make a case that the industry doesn’t have a bright future.
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For two days it’s been raining here in Winnipeg, with clashes of thunder scaring my dogs, delighting my children and making the world seem grey, menacing, cold and unpromising.
Here’s a good description of the situation: “The thunder was continuous. The lighning went on and off as though a child were playing with a switch. On the vast expanses of water, the heavy branches of riven trees floated and tossed like monsters. The fish of Gormenghast river swam out in every direction, and could be seen steering through the castle’s lowest windows.”
Actually, that’s from the novel Gormenghast, by Mervyn Peake, which I am re-reading at present. But it’s apropos.
It’s also a fitting description of the mood in the overall world markets, be they stocks, bonds, commodities: the world seems grey, grim, unpromising. Not black, mind you. It doesn’t feel like winter. But the equity markets are staggering along at levels they’ve been at for about a year – the Dow just doesn’t want to move far away from 10,000 – and commodities seem to have hit a plateau.
Here’s a collection of flat-looking markets:
DJIA
CRB commodities index
Canola
Minneapolis wheat
Of course, the flatness in wheat and canola is a new thing and prices are a lot better than they were, so generally we should be happy and willing to suffer this type of stagnation. Flat highish prices are good. Stumbling along at this level through the winter would be a pleasant sensation.
But it’s going to be interesting to see where we go from here, now that the autumn is upon us. Commodities can trade contrary to and regardless of the equity markets, and that’s probably a good thing right now. September, October and November generally bring the biggest market slumps and crashes – 1929, 1987, 2008 – and all the lingering fears over deflation, double-dip recessions and general economic malaise could give us a couple of ugly months in the equity markets.
In 1929 and 2008 commodities got sucked down too, in lockstep with stocks, but that’s a rare phenomenon. That only happens directly during massive selloffs, when everyone liquidates everything. Hopefully we’re in a situation more similar to the 1970s, when stock market slumps could occur right beside commodity market rallies.
I’m thinking these dark thoughts today because it’s grey, rainy, a little chilly and all I read are accounts of delayed harvesting progress and the threat of frost increasing as crop maturity falls behind. If tomorrow the sun comes out, the skies are blue, the mosquitoes leave town and I read accounts of combines rolling, I’ll cheer up.
But the way the markets move will probably have a lot to do with the weather in Chicago, New York and London. How ever the weather makes people feel in the cities that stock and commodity traders live will probably set the short term trend, as thousands of traders and brokers return from summer holidays and cottage vacations. If they’re in a poopy mood because of rotten weather like this, we might take a bit of a battering, as they do the trader equivalent of kicking the dog because they’re in a bad mood.
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As always happens, whenever I go away for a couple of weeks of holidays the markets get exciting. Fortunately I was still around when the Russians slammed the door shut on their wheat exporters, which began a round of fun and commotion that’s still going on today. Wheat’s been wild, upping and downing itself on the charts, and who would have expected that from what was seen as the sad sack crop of the year back at seeding time. (You know, a lot of years that’s the way to pick the crop with the greatest likelihood of a rally: pick the one that looks crappiest in March. Because it looks bad, most of the negativity is probably already priced into the crop. Doesn’t always work, but years like this the market can swing wildly the other way when its complacency gets shocked.)
Good thing too, because prairie farmers need the crop for their rotations so even if they don’t like the looks of future prices, they’ve got to grow the stuff so every tick up in wheat is dollars in most prairie farmers’ pockets.
I’ve gotta say I love the brutal way the Russians do things: wheat stocks look iffy, so they bring a big black boot down on the throat of the exporters. I don’t think it would be much fun to be in the Russian grain biz right now. But what should you expect from a fellow like Vladimir Putin, who showed us a couple of years ago how he treated a perceived threat like that posed by unmighty Georgia?
A decisive fellow, no doubt.
Now, unfortunately for those of you who are growing lots of spring wheat and didn’t price it in the incredible surge that I was hearing about during my holiday, most of the gains since the end of August have been lost. But the gains of July haven’t been lost, and hopefully we’re in a new price range. The highs seem to be getting lower in this new range but the lows seem to be finding resistance at about $7.00 per bushel on the Minneapolis December spring wheat futures contract.
A peak, then a return to seven bucks.
My buzzing little Blackberry told me a few minutes ago that the new Canadian Wheat Board Pool Return Outlook is jacking up new crop values by between $33 and $53 per tonne, narrowing the gap that was forming between most market expectations of likely wheat values and those in the last PRO, which was put together in the midst of the July rally. Durum prices are up $33 to $41 per bushel, malting barley is up $46 and export feed barley PRO values are up $66. That increase takes Number One CWRS with 13.5 percent protein to $7.57 now from $6.12 expected just a month ago (minus transportation and other deductions to port), which is a heck of a bunch of difference.
No one in the world right now is too worried about being able to find durum this winter. But even there this recent rally has dragged up prices sharply, and I suppose we should all thank muscly Vladimir above for setting the overall wheat market alight. This morning I met with some Japanese millers and durum buyers and they told me that they’re anxiously watching the Russian situation. That’s not because they buy Russian durum – they don’t, because it isn’t up to their standards for consistency and quality. But they, like everyone else, has seen this Russian fire get lit under the wheat market and they’re having to adjust their budgets and expectations for purchasing now that wheat of all forms is no longer so cheap.
So, on behalf of farmers on the Canadian prairies, I’d like to thank Vladimir Putin for bringing his boot down on Russian wheat exports and for making the world notice wheat again.
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When’s mediocrity a good thing?
When the word describes this year’s prairie field crops, that’s when.
And that’s what the Canadian Wheat Board thinks is coming this fall – if frost doesn’t nip it early.
The board did its year-end shindig this morning and gave its current estimate of the prairie wheat and barley crops.
Here’s what it thinks is coming: 15.6 million tonnes of milling wheat, 2.9 million tonnes of durum and 7.5 million tonnes of barley. That compares to 18.8, 5.5 and 8.9 last year.
That’s a small production year, but not disastrously so. And most of that lowness comes from unseeded and abandoned acres, which the wheat board pegs at about 13 million acres. The crops that are growing, in fact, look OK out there. There are big, bad patches like northeastern Saskatchewan and the Peace River country, but in most places crops look pretty good.
So the board’s going to be marketing a smaller-than-average crop of OK grain into a presently rising market for wheat. That will change if there’s an early frost, of course, but for now, in the aggregate, it looks like the prairies will deliver a slightly sub-par crop.
But, for farmers, that doesn’t really matter. Some farmers are going to get no crop at all and may get ruined and driven out of the business. Others, like many in Alberta, will have their best year ever. That’s the farm by farm reality of agriculture. What I heard today told me that the Canadian grain industry will do fine this year. But for farmers, you’ve got to go farm by farm to figure that out.
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What’s up with Viterra this week?
Take a look at this five-day chart of its stock price:
Gaining ground, then a sudden leap
That’s a nice little run-up in price. And it’s even more impressive when you look all the way back to the start of this 2010th year of our lord:
Turnaround?
It’s been a pretty straight slide down this year for Viterra shares, even before the prairies’ crop production problems occurred or became realized by the market. There’s been little relief from the softening of Viterra, apart from a brief blip or two, all the way down to the seven-buck line. But form most of the last month Viterra has been firming up, steadily rising, and just today (Wednesday morning about 10:00) had jumped two percent.
So what’s up with Viterra? Why this newfound strength? As always, the market only gives us a price, and that leaves us all to chatter about the 10,001 things that could be behind the newfound strength. This baseless chattering is referred to in the markets as “analysis.”
Perhaps it’s just gotten too cheap and as such a gosh-darned good company its fans are snapping up heavily discounted shares before what they assume will be an inevitable rise back to better levels. Or, on a similarly fundamental level, perhaps investors have received secret information from spies operating inside the Canadian Wheat Board that the agency is going to report a much bigger crop than previously expected when it does its year-end song and dance on Friday and are piling into Viterra shares. (The latter scenario is extremely unlikely and not to be believed, but with all this recent stuff about Russian spies in the U.S., that new Angelina Jolie movie – which is about spies- and the news reports about a sneak in the U.S. military leaking all those classified military documents about Afghanistan, I’ve got espionage on the brain.)
Here’s a more technical explanation that was forwarded to me this morning:
Jul 27, 2010 (SmarTrend(R) News Watch via COMTEX) — SmarTrend has detected shares of Viterra (NASDAQ:VTRAF) have bullishly opened above the pivot of $7.66 today and have reached the first resistance level of $7.69.
We are watching for a cross of the next upside pivot targets of $7.74 and $7.82. Also, the shares are currently trading above the 50-day moving average of $7.23 and should find resistance at the 200-day moving average of $8.86.
SmarTrend, our proprietary pattern recognition system, alerted subscribers to buy shares of Viterra on July 26, 2010 at $7.66. Since the call, the stock has risen 0.8%.
(That’s the end of the news item.)
The difference in share prices between the charts above and this news item comes, I assume, from the different dollar currencies being used to price the NASDAQ-listed Viterra and the Toronto listing of Viterra. And I assume they’re the same company.
Anyhow, that’s a useful technical take on what’s going on. As most of you know, technical analysis is used to catch trends and trend changes in prices before the fundamentals have been figured out. Technical analysis relies on the assumption that all sorts of fundamental changes can be going on beneath the surface of markets before chattering fundamental analysts are struck in the face by them, so if you want to spot trend reversals early, watch the technicals, don’t wait for lagging reports of fundamental shifts.
I don’t know if the news item I popped in up there is right. There are a thousand technical indicators one can look at.
Oddly, yesterday I was looking at Viterra charts and thought I noticed a certain bullish something, at least according to the caveman-level technical indicator I was using. I noticed with my little eyeballs that Viterra shares seem to bounce off the $7 mark. They did that twice in late 2008, as the world was ending, and they just did it a month ago. So I thought: “Hmmm. That’s interesting.”
It’s far from established that this is indeed a turnaround. As you can see from this chart, there have been a number of recoveries before the slide reasserted itself. And this may just be one of those. But $7 could be an important resistance zone, and Viterra may have just bumped off of it.
Personally, I’d like to think there’s a fundamental reason behind this that will help farmers, that there is in fact a bigger crop coming than we have been thinking and that will help grain handlers and marketers. I was speaking to canola watchers last week and they were all upping their canola crop production estimates as the crop shows – once more – its ability to overcome significant challenges. Wheat doesn’t seem like that kind of crop, but Friday we’ll find out how much the wheat board now thinks is out there in farmers’ fields. With luck there’s more wheat out there as well.
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It’s amazing how an event can send positive sentiments surging.
I remember the lift I got when I arrived in London in 1985 for a summer holiday with my parents on the day that Live Aid was being held. I dropped my suitcase off at Uncle John’s, ran for the tube station, got to Wembley, bought a scalped ticket and saw the show of a century.
Queen performs at Live Aid. I'm in the upper right hand corner in the crowd. I'm the guy wearing the jean jacket.
Now my excitement level rises for quite different types of concerts. In fact, at lunchtime just now I spent $140 on tickets for a show I’m very pumped about: Sesame Street Live. I’d like to claim that I’m not personally that excited, but just excited on behalf of my toddler daughters Noella and Philonise, however as a lifelong fan of Cookie Monster et al I have to admit I’m likely to be cheering as loudly as they will be when those big furry loveables come on stage Thursday night.
Get ready for excitement!
See all those happy muppets in the pic above? Well, that’s the way traders have been feeling lately about wheat prices. And, like me for Queen or Sesame Street, they’re being carried away on a magic carpetride of enthusiasm for wheat prices, even though most don’t think there’s a concrete reason for all their excitement.
Wheat prices have shot much higher in about a month, rising by about $1.20 per bushel for most new crop futures contracts. There are problems in Russia, Kazakhstan and Ukraine with those wheat crops. But these problems don’t alleviate the reality that the world is still awash in wheat – especially junk-quality wheat like that produced in the Former Soviet Union. (A good examination of this can be found in the July 22 issue of The Western Producer, in a page 20 column by my markets editor D’arce McMillan). In other words, we haven’t found $1.20 worth of problems with world wheat production to justify this recent rise.
But of course corn is a major part of the rally, being the underlying cereal grain stock that all other grain crops are based upon. And as you can see in the chart below, corn and wheat both took off at about the same moment.
Corn's fallen off but wheat is firmer
But in this chart you can see that wheat has not had the sudden drop-off that corn’s experiencing, but has been much stickier. Corn has lost much of its recent rally but wheat’s still holding most of its gains.
Why would that be so, when corn’s stocks are much tighter and no one fears a wheat shortage? It seems to be sentiment, enthusiasm for wheat. And it seems to be a sentiment shift not towards overall bullishness towards wheat, but just an end to the bearishness. People have been incredibly bearish towards wheat for more than a year now, and the FSU problems are reminding complacent traders and users that wheat will not always be available in mass quantities at cheap prices.
From what I’ve heard from analysts and brokers I’ve been speaking with, the friendly view of wheat wasn’t first embraced by commercial users, but by commodity speculators, including hedge funds. They had been the most bearish on wheat, had huge short positions, and got scared when the FSU began to have real problems. And then, looking more closely at wheat, they realized the stuff was cheap in relation to the other ag commodities. So, figuring it’s good to buy stuff cheap, they rolled out of their short positions and into long positions, helping what could have been a small adjustment up in the wheat price complex into a major one. And once moods shift, they can stick around for a long time.
As Joe Strummer said on a T-shirt I used to wear: The Future is Unwritten. We don’t know where wheat production is going. But an analyst I spoke with a couple of days ago noted that this summer’s world wheat production breaks the trend of growing wheat stockpiles, and that’s what the problems in the FSU might really mean: we can no longer assume the world will be producing more and more wheat every year.
So we can allow ourselves to get excited about wheat prices again. Perhaps the USDA will break our hearts by finding big yields hiding inside U.S. wheat crops – they’re looking at this this week – but perhaps what will get broken is that awful bear’s back. So perhaps we’ll be able to rock out with wheat prices the way I intend to rock out with Elmo on Thursday night.
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If you’ve been busy tending to your crops, you might have missed the recent rocket rally in canola.
So here it is:
A magnificent rally
Today canola is fighting with the resistance level of $460 per tonne, so it’s crucial day in the life of this rally.
That red line is a simple moving average, which I included in order to provide a sense of just how powerful the recent rise has been. A surge like this drives the price well away from the moving average, as you can see. That’s both the sign of a powerful movement that has a lot of momentum behind it, and a possible warning of a reversal danger. It’s hard for prices to skyrocket like this without burning out the engine and quickly returning to earth. It wouldn’t be too unpleasant a situation for canola to level-out, rather than fall, and most farmers would make good money with futures prices like this. A continuing surge into harvest would make us all delighted.
I called a trader a few minutes ago to get his sense of how likely this rally is to continue. He told me that today’s closing price will be keenly watched because $460 has been a short-term resistance level, and a break convincingly above that – which to him was $463 or higher – would be taken by many to be a sign that another leg upwards to $480 is likely beginning. A close below that is bearish. And even a close at $460 would be slightly bearish, because it would suggest canola is having trouble breaking through resistance.
I note with some interest – actually quite a lot, because I love market history – that $460 is a long, long, long time resistance level, representing the former peaks of the pre-1998 market. Look at this long term chart, dating back to 1986:
I would like to believe that canola and other ag commodities have broken into a new, long-term trading range, with the old highs being the new lows. (Anyone remember $250 canola? We had two troughs in the 2000s that took us there.) While we’ve fallen below $460 for periods in the post-2008 world, we have not broken down to anywhere near the old lows, and are arguably still in the top end of the old range. So getting back above $500 would be something that could allow us to put a bit of confidence into the belief that we’ve left that stinky old trading range behind and that $380-$460 is the low end of the new range.
So watch what canola does today.
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How’d you like a higher dollar?
Well, you’ve got one. This morning the Bank of Canada upped its trend-setting interest rate by a quarter-point to 0.75 percent. That means almost all floating rates will immediately increase and other interest rates be affected, although longer rates generally have the least direct connection.
And it means that the Loonie popped up 0.31 of a cent today to 95.11 (so far), which effectively cuts the price of most agricultural commodities by about one-third of a percent. The U.S. rate is flat at effectively zero and the Canadian rate has just shown that it is much more likely to increase in future, so that makes the Loonie a better buck than the Greenback in the minds of most in the market.
The Bank of Canada put out some less than exuberant forecasty words with its hike this a.m., cutting its growth prospects for the rest of this year and for next year, and pushed off the date when it expects the Canadian economy to be operating at full capacity.
But its forecast is still stuffed full of roses compared to the situation in the U.S. The BOC is expecting Canuck growth of 3.5 percent and 2.9 percent. In the U.S., most forecasters I’ve heard would be happy with two percent growth. What they’re worried about in the U.S. is a double-dip recession or – much worse – deflation. Many sage market watchers – such as Dennis Gartman and Gary Shilling – have called for long term U.S. growth at a sluggish two percent and PIMCO – the gods of the bond buy side – basically agrees.
So we’ve got strong commodity economies like Canada and Australia, which are boosting rates and seeing decent economic growth, weak industrial economies like the U.S. which is teetering on the edge of recession and depression with millions of unemployed and financial problems that would choke a whale, and emerging markets countries like China and Brazil that seem OK.
So what does this mean for crop and commodity prices? To me the charts are saying they can’t decide. So they’re jigging around in a new range following a rebirth in confidence that led to pretty hefty summer gains until the economy seemed to become unglued again.
Have a look:
Chicago winter wheat
Chicago oats
Chicago corn
Chicago soybeans
The world is still mightily unsettled after that 2008 meltdown and we’re flopping around like fish on the bottom of the boat, trying to get out of these doldrums, preferably without that nasty hook poking through our cheek, looking for safe waters.
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Everyone in the world of grain – especially farmers – has been slapped upside the head by the wildness of the crop markets in recent years. From the lows of the early 2000s through the sky-highs of 2008 to the following crash and recovery, grain and oilseed prices have been volatile.
How do you hedge for that volatility? There are short term, medium term and long term answers for that question. Here’s a medium-term answer from the Mexican grain buyer I met with Tuesday. He said speculators had made price swings big, and that this was now a fact of life. So what does he, as a grain buyer – living on the spread between what he buys wheat for and what he can sell bread for – do:
“What can you do with the speculators? Nothing. Only we need to protect us. To take options. To have target prices. There’s a lot of volatility. (If) you put open orders in the market, normally you (will eventually see the order filled). You only need to be patient. Months before you receive your vessel you can take position of the price that you need to meet your budget target.”
Sounds pretty sensible to me, and as if he has a marketing plan, which he does.
“You see high prices. You see low prices. Everything that goes up comes down. You need to be patient and have a good strategy.”
That sounds to me a lot like what most farm marketing advisors say: figure out the prices you need to make a reasonable profit margin, then start picking away at sales. You’ve got to base it on what’s actually possible in the market environment that year – and cost of production has little to do with price in the short term – but by knowing what are reasonable prices, at least a marketer can know when to consider moving into sales or purchases.
The problem with this approach, of course, is that it only really applies to volatility within a range. If everything that goes up predictably comes down, and goes up and down a bunch, then this strategy works. But what if prices are moving into a new long term high, or low, range? Then your expectation of prices naturally returning to where you expect them to return could be way off, and in a falling market a patient seller could find himself patiently sitting on a downbound train heading towards the bottom of a canyon. A buyer in a rising market could find himself hanging on for a return to lower prices that never comes, and like that Greek guy that flew too close to the sun, end up flapping featherless towards the sea.
That’s why I liked the word “options” that he used above. I don’t think he was referring to call and put options, but those are what are ideal to use in hedging strategies for unpredictable times. You can take a position, not be locked into the price, but at least have something as an insurance policy. But how many people use options? Not many. So we’ll always be complaining about volatility, because we don’t prepare for it.
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This week The Western Producer unveiled its very own cam girl.
Say hello to: The Western Producer Cow Cam. (This is fully family-appropriate viewing and something I’m looking forward to showing to my young daughters.) This cam carries footage of 17 minutes in a day of the life of Raven, a five year old purebred Simmental cow, who lives near Glenwood in Alberta.
The footage was recorded by our editor-in-chief, Barb Glen, and edited by our production section editor, Mike Raine, so you can see that we employed our top people and got some pretty great stuff. It’s up on our website now, at www.producer.com. I particularly like the stuff at the 3:30 mark onwards, when a vaguely menacing group of cows and calves comes into the picture. (Don’t worry – I’m not going to spoil the ending!)
I’m not sure if Barb actually strapped herself on the back of Raven and held the camera, or if she somehow attached the camera to Raven’s left shoulder in a way neither Raven nor the other bovines would rub off, but it’s pretty cool, detailed stuff. You can really hear the grass being ripped up by those bovine teeth. And the mooing is impressive.
If you’re into action movies, check out the section from about 6:45 to 7:00.
And if you just want to see a nicer office environment than the one you’re sitting in right now, check the whole thing out.