It now looks likely that a new NAFTA will be negotiated. This is bullish for two reasons:
- It shows that Trump really wants deals, and is willing to be realistic.
- It puts this specific issue to bed.
It seems that all the trade negotiations are running on the US election calendar. The NAFTA talks have to conclude the Friday to be within the current congress's 90-day window.
The Chinese negotiation was intentionally put off until after the elections. This is much more difficult because it involves our attempt to change the basic Chinese business model. I predict that this will lead to a major problem after the Nov elections.
Wednesday, August 29, 2018
Long soybeans again
I intend to keep trading this from the long side. Also considering going long CF Holdings.
Tuesday, August 14, 2018
Monday, August 13, 2018
Wednesday, August 8, 2018
Bottom in the Agriculture Sector
I'm not the kind of guy who goes on about the mainstream media (MSM). Sure, they get some things wrong, they are overly conflictual, and they are horribly biased against Trump. But unless they impinge on what I know best, I usually don't talk about them.
However, they are getting things absolutely wrong on the impact of the China trade wars on commodities. Here are two headlines from today on the same MSM homepage:
U.S. LNG exports to China slump as buyers look elsewhere amid trade spat
Tellurian plans to start building Louisiana LNG export plant in 2019
Now these are pretty much contradictory. No one would build a new LNG terminal if the major customer is saying no.
The point being missed is that LNG, like soybeans, is a fungible commodity. Brazilian beans are virtually identical to US beans. If China still needs beans, and they do, they will buy from Brazil. So who do Brazil's usual customers buy from. The US of course.
Now there still will be an economic loss to American farmers, mostly because of transportations inefficiencies. But that's small. Longer term, if this encourages S. American farmers to plant more acres, that will also be a loss. That won't happen at current prices, and if prices go up not for the next couple of years.
The recent bear market in corn/beans has somewhat coincided with the China spat, so the MSM have played it that way. It's conflictual, and it's a dig at T. But something else has happened during that time - wonderful weather and a beautiful, low-risk crop. That's what really did it.
I say this because I think we have made a bottom in corn/beans. Actually corn is a fair ways off the bottom. The crop is not only good, it's early. So we had an early bottom in mid July. Now the market is going to look at demand, which is good.
I'm long corn, although beans may actually be the better item here. I'm also long agricultural equipment suppliers DE and AGCO (via short puts)
However, they are getting things absolutely wrong on the impact of the China trade wars on commodities. Here are two headlines from today on the same MSM homepage:
U.S. LNG exports to China slump as buyers look elsewhere amid trade spat
Tellurian plans to start building Louisiana LNG export plant in 2019
Now these are pretty much contradictory. No one would build a new LNG terminal if the major customer is saying no.
The point being missed is that LNG, like soybeans, is a fungible commodity. Brazilian beans are virtually identical to US beans. If China still needs beans, and they do, they will buy from Brazil. So who do Brazil's usual customers buy from. The US of course.
Now there still will be an economic loss to American farmers, mostly because of transportations inefficiencies. But that's small. Longer term, if this encourages S. American farmers to plant more acres, that will also be a loss. That won't happen at current prices, and if prices go up not for the next couple of years.
The recent bear market in corn/beans has somewhat coincided with the China spat, so the MSM have played it that way. It's conflictual, and it's a dig at T. But something else has happened during that time - wonderful weather and a beautiful, low-risk crop. That's what really did it.
I say this because I think we have made a bottom in corn/beans. Actually corn is a fair ways off the bottom. The crop is not only good, it's early. So we had an early bottom in mid July. Now the market is going to look at demand, which is good.
I'm long corn, although beans may actually be the better item here. I'm also long agricultural equipment suppliers DE and AGCO (via short puts)
Friday, August 3, 2018
Major Buy in the Materials Sector?
The real money in trading is made when assets get dirt cheap and have a value backstop. That's when you can really load the boat with relatively low risk. (Note: I 'm talking about real risk here, not day to day volatility. Vol normally goes up in these situations.) I've mentioned a few of these on this blog: rhodium, vanadium, nickel. I think we are six months or so away from a major bottom in the entire materials sector. Here's why.
There are two basic factors that determine the long term commodity cycle. On the demand side is world economic growth, particularly in the commodity-intensive developing countries. On the supply side is the amount of capital going into investment in commodity capacity. A lot of commodity capacity gets used up in normal operations (think of a mine's depletion) so capital is necessary on a sustaining basis.
We have been in a state of low investment for several years now. Most of this is due to the over-investment in the '08 - '13 period. But time marches on, and the lead time for new mines, oilfields and agricultural plantations is long. So there are many materials which will not see capacity increases, and perhaps declines, for years.
The demand side is more interesting. Many nations/regions follow a natural commodity demand cycle. As they develop and put infrastructure, consumer durables and structures in place, they become commodity-intensive. Then as development continues, the service sector, which uses few commodities, rises to the fore. The US/EU/Japan are in that situation now. The growth in commodity demand comes from emerging markets, mostly Asia and mostly China (for now).
The key to Asian development over the last 50 years has been to start with the export sector. For various reasons, that mostly means exporting to the US. Now economic theory tells us that the creation of a new pool of low-wage workers in Asia will help workers in Asia and capitalists in the US. It will hurt workers in the US. That is pretty much what happened. The failure to spread the benefits of globalism is one of the US's great economic mistakes.
Now we have a reaction. Regardless of what you think of Trump, he is making an effort to protect US workers. This has wide political support, even among Democrats. So I'll bet that this is going to be a long lasting issue. I'll bet that the US trade deficit will decline.
Will this lead to lower growth in emerging markets? The world's stock markets certainly think so. I do too. Basically, it means that the new driver of growth will not be exports to the US, but borrowing from China. This is not as strong a force.
OK, how long will it take for the markets to discount this. Not much I think. My guess is that the imposition of widespread tariffs on China will be a watershed. This will happen over the next six months or so. I would expect to see some commodities fall substantially when this happens.
At that point we have our buy. Remember, the world economy will not decline. It will just have a growth slowdown in the commodity-intensive regions. Meanwhile, the falloff in productive capacity will continue. I do not anticipate a deflation, so cost of production will provide a low risk floor.
That's what I think. Be interested in you opinions on this.
There are two basic factors that determine the long term commodity cycle. On the demand side is world economic growth, particularly in the commodity-intensive developing countries. On the supply side is the amount of capital going into investment in commodity capacity. A lot of commodity capacity gets used up in normal operations (think of a mine's depletion) so capital is necessary on a sustaining basis.
We have been in a state of low investment for several years now. Most of this is due to the over-investment in the '08 - '13 period. But time marches on, and the lead time for new mines, oilfields and agricultural plantations is long. So there are many materials which will not see capacity increases, and perhaps declines, for years.
The demand side is more interesting. Many nations/regions follow a natural commodity demand cycle. As they develop and put infrastructure, consumer durables and structures in place, they become commodity-intensive. Then as development continues, the service sector, which uses few commodities, rises to the fore. The US/EU/Japan are in that situation now. The growth in commodity demand comes from emerging markets, mostly Asia and mostly China (for now).
The key to Asian development over the last 50 years has been to start with the export sector. For various reasons, that mostly means exporting to the US. Now economic theory tells us that the creation of a new pool of low-wage workers in Asia will help workers in Asia and capitalists in the US. It will hurt workers in the US. That is pretty much what happened. The failure to spread the benefits of globalism is one of the US's great economic mistakes.
Now we have a reaction. Regardless of what you think of Trump, he is making an effort to protect US workers. This has wide political support, even among Democrats. So I'll bet that this is going to be a long lasting issue. I'll bet that the US trade deficit will decline.
Will this lead to lower growth in emerging markets? The world's stock markets certainly think so. I do too. Basically, it means that the new driver of growth will not be exports to the US, but borrowing from China. This is not as strong a force.
OK, how long will it take for the markets to discount this. Not much I think. My guess is that the imposition of widespread tariffs on China will be a watershed. This will happen over the next six months or so. I would expect to see some commodities fall substantially when this happens.
At that point we have our buy. Remember, the world economy will not decline. It will just have a growth slowdown in the commodity-intensive regions. Meanwhile, the falloff in productive capacity will continue. I do not anticipate a deflation, so cost of production will provide a low risk floor.
That's what I think. Be interested in you opinions on this.
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