UBS Investment Research (UBS) downgraded two top agriculture companies Mosaic Co (MOS) and Potash Corp (POT) to Neutral from Buy on Friday. This comes after the Department of Agriculture says profits for U.S. farmers will plunge more than expected this year, dropping 38 percent from 2008 as the recession erodes demand for crops, livestock and dairy products.
These downgrades put pressure on the Market Vectors Agribusiness ETF (MOO) which holds top stakes in the two companies. The ETF (MOO) primarily invests in equity securities of U.S. and foreign companies primarily engaged in the business of agriculture. The ETF has enjoyed nice gains since its November 08 low.
We have included a list of the top holdings within the ETF:
TOP 10 HOLDINGS (MOO) ( 60.41% OF TOTAL ASSETS)
Company Symbol % Assets
ARCHER DANIELS MDLND (ADM) 5.78
DEERE CO (DE) 4.85
Komatsu Ltd. N/A 4.55
Kubota Corporation N/A 4.54
MONSANTO COMPANY (MON) 6.08
POTASH CP SASKATCHEW (POT) 8.82
SYNGENTA AG ADS (SYT) 7.8
MOSAIC COMPANY (THE) (MOS) 7.6
Wilmar (F34.SI) 5.67
Yara International (YAR) 4.72
Monday, September 7, 2009
Sunday, September 6, 2009
The tale of two grains
The price of corn is down, and it is all on supply news.
This spring, farmers put 87 million acres of corn in the ground, and even though planting was late (and, therefore, so was crop development), the current buzz is that it's going to be a bumper year.
As of the August 12 World Supply and Demand Estimates, the USDA is expecting 12.76 billion bushels of corn to be harvested this year, up from last year's 12.1 billion bushels. The jump comes both from the number of acres harvested (80 million this year, versus last year's 78.6 million) and projected yield increases (159.5 bushels/acre, compared with last year's 153.9). Of course, a successful harvest will depend on the weather staying warm and dry, but if it does, corn supplies are projected to hit a record 14.5 billion bushels.
All this means that there's plenty of corn to go around - probably more than needed, especially since the demand picture looks so dismal right now. Demand in the feed sector remains weak, and ethanol demand is questionable at best. Between tight credit and sub-$70 oil, the push for more ethanol is more of a nudge than a shove, unlike the days when oil was over $100 and credit was easy.
However, there is one question mark in the demand picture: high-fructose corn syrup. That compound, much maligned in "The Omnivore's Dilemma" and currently starring in a feel-good PR campaign by the Corn Refiners Association, is a cheap substitute for sugar. With sugar now over 23 cents a pound and possibly on its way higher, we could see new demand, as some food producers increasingly switch over to the lower-cost corn-based sweetener.
Soybeans have a different story, and it's as simple as ABC: Argentina, Brazil and China. But first, we need to start at home.
The U.S. soybean supply is at its lowest in five years, with beginning stocks sitting at 110 million bushels in July. Compare that with last year's 205 million bushels, or 2007/08's 574 million bushels, and you can understand why analysts call the market tight.
Adding to last year's supply problems, Argentina suffered a drought and had a dismal harvest for the 2008/09 crop year (ending in June). Only 32 million tons of soybeans were harvested - a 33% drop from the 2006/07 crop of 47.5 million tons. (Brazil also suffered lower soybean production due to drought, although it wasn't hit nearly as bad as Argentina.)
But planting season is coming - and Argentinian and Brazilian farmers have a couple of things going for them as they plant. First of all, soy is the cheapest crop to plant, as opposed to corn or wheat, and the credit crunch is still alive and well in the agricultural sector. Second, the rains are back. Weather forecasters expect El Nino to drop much-needed rain all over Argentina's growing regions by November, right in time for planting. Third, farmers in South America know that the less-than-exceptional U.S. harvest means that all eyes will turn to Argentina and Brazil for their soybean supply.
One country sure to be watching the U.S. harvest is China. Last May, China's demand for old crop soybeans made headlines, and there have been reports of sales for delivery in the 2009/10 marketing year that began on Tuesday. It won't stop here; analysts expect China will continue its usual pattern of stocking up on soybeans during price decreases.
This year, acres devoted to soybeans increased to 77.7 million. Even though crop development is a little slow compared with the five-year average - due to the late planting and unusual summer weather - production should be good. If the weather remains warm and dry while the beans finish developing and are harvested, yields are estimated to be 41.7 bushels/acre or 3.2 billion bushels - roughly 240 million bushels more than last year.
Betting On The Weather
These last few weeks of crop development and harvesting are heavily reliant on the weather. Good weather means high corn and soybean yields - but low prices. Bad weather means lower yields and difficulty drying out a wet harvest, but also the possibility of higher prices. No wonder all eyes are on The Weather Channel.
We've got farmers hoping for dry weather and no frost, so they can get their crops in - and at this point, the bigger, the better for them. Traders, on the other hand, are watching the weather reports as well - but for bad news. If you look at the charts, you can almost tell if traders are betting on frost or not, because at this point in the season, that's what moves the curve. As Chad Henderson from Prime Ag Consultants said about corn's performance last week:
"Everyone who bought last week was betting on a frost. We didn't get it."
As of Wednesday, the weather picture for the next few weeks seems in favor of a good harvest, which corn and soy prices reflected. As of 2:16 p.m. on Wednesday, December corn had dropped 2.25 cents to $3.17 a bushel on the day, and November soybeans dropped 3.2 cents to $9.522 a bushel.
Already Looking Ahead
This year's corn and soybean harvest isn't even complete yet, but that hasn't stopped farmers from planning what to plant next year. A recent survey by Farm Futures indicates that next year, farmers may move away from planting soybeans and plant more corn - even though the corn/soybean price ratio favors soybeans.
Of course, since much of this year's crop is still in the field, plans may change, especially as the market prices factor in the harvest. More than any other time of the year, this critical pre-harvest period is really just a bet on the weather.
This spring, farmers put 87 million acres of corn in the ground, and even though planting was late (and, therefore, so was crop development), the current buzz is that it's going to be a bumper year.
As of the August 12 World Supply and Demand Estimates, the USDA is expecting 12.76 billion bushels of corn to be harvested this year, up from last year's 12.1 billion bushels. The jump comes both from the number of acres harvested (80 million this year, versus last year's 78.6 million) and projected yield increases (159.5 bushels/acre, compared with last year's 153.9). Of course, a successful harvest will depend on the weather staying warm and dry, but if it does, corn supplies are projected to hit a record 14.5 billion bushels.
All this means that there's plenty of corn to go around - probably more than needed, especially since the demand picture looks so dismal right now. Demand in the feed sector remains weak, and ethanol demand is questionable at best. Between tight credit and sub-$70 oil, the push for more ethanol is more of a nudge than a shove, unlike the days when oil was over $100 and credit was easy.
However, there is one question mark in the demand picture: high-fructose corn syrup. That compound, much maligned in "The Omnivore's Dilemma" and currently starring in a feel-good PR campaign by the Corn Refiners Association, is a cheap substitute for sugar. With sugar now over 23 cents a pound and possibly on its way higher, we could see new demand, as some food producers increasingly switch over to the lower-cost corn-based sweetener.
Soybeans have a different story, and it's as simple as ABC: Argentina, Brazil and China. But first, we need to start at home.
The U.S. soybean supply is at its lowest in five years, with beginning stocks sitting at 110 million bushels in July. Compare that with last year's 205 million bushels, or 2007/08's 574 million bushels, and you can understand why analysts call the market tight.
Adding to last year's supply problems, Argentina suffered a drought and had a dismal harvest for the 2008/09 crop year (ending in June). Only 32 million tons of soybeans were harvested - a 33% drop from the 2006/07 crop of 47.5 million tons. (Brazil also suffered lower soybean production due to drought, although it wasn't hit nearly as bad as Argentina.)
But planting season is coming - and Argentinian and Brazilian farmers have a couple of things going for them as they plant. First of all, soy is the cheapest crop to plant, as opposed to corn or wheat, and the credit crunch is still alive and well in the agricultural sector. Second, the rains are back. Weather forecasters expect El Nino to drop much-needed rain all over Argentina's growing regions by November, right in time for planting. Third, farmers in South America know that the less-than-exceptional U.S. harvest means that all eyes will turn to Argentina and Brazil for their soybean supply.
One country sure to be watching the U.S. harvest is China. Last May, China's demand for old crop soybeans made headlines, and there have been reports of sales for delivery in the 2009/10 marketing year that began on Tuesday. It won't stop here; analysts expect China will continue its usual pattern of stocking up on soybeans during price decreases.
This year, acres devoted to soybeans increased to 77.7 million. Even though crop development is a little slow compared with the five-year average - due to the late planting and unusual summer weather - production should be good. If the weather remains warm and dry while the beans finish developing and are harvested, yields are estimated to be 41.7 bushels/acre or 3.2 billion bushels - roughly 240 million bushels more than last year.
Betting On The Weather
These last few weeks of crop development and harvesting are heavily reliant on the weather. Good weather means high corn and soybean yields - but low prices. Bad weather means lower yields and difficulty drying out a wet harvest, but also the possibility of higher prices. No wonder all eyes are on The Weather Channel.
We've got farmers hoping for dry weather and no frost, so they can get their crops in - and at this point, the bigger, the better for them. Traders, on the other hand, are watching the weather reports as well - but for bad news. If you look at the charts, you can almost tell if traders are betting on frost or not, because at this point in the season, that's what moves the curve. As Chad Henderson from Prime Ag Consultants said about corn's performance last week:
"Everyone who bought last week was betting on a frost. We didn't get it."
As of Wednesday, the weather picture for the next few weeks seems in favor of a good harvest, which corn and soy prices reflected. As of 2:16 p.m. on Wednesday, December corn had dropped 2.25 cents to $3.17 a bushel on the day, and November soybeans dropped 3.2 cents to $9.522 a bushel.
Already Looking Ahead
This year's corn and soybean harvest isn't even complete yet, but that hasn't stopped farmers from planning what to plant next year. A recent survey by Farm Futures indicates that next year, farmers may move away from planting soybeans and plant more corn - even though the corn/soybean price ratio favors soybeans.
Of course, since much of this year's crop is still in the field, plans may change, especially as the market prices factor in the harvest. More than any other time of the year, this critical pre-harvest period is really just a bet on the weather.
Friday, September 4, 2009
Burned By Morgan Stanley, Potash & More
They looked like hot stocks. So how are the traders playing Morgan Stanley, Potash and more now that they’ve been burned?
Steve Grasso
On July 20th the Governor thought a move higher in the casino space was nothing but a losing bet. At the time he said, “Hold back on MGM , LVS and other casino stocks purely on technical basis. I think you've got to hold back on the casino names."
As it turns out Lady Luck was not smiling on this trade. Over the last month shares of MGM are about 7% higher while Las Vegas Sands soared nearly 40%. What does Grasso have to say for himself?
We've seen a nice rally in almost every stock since that time, he says. I'd still stay away from casinos.
Joe Terranova
On August 6th The Liquidator turned bullish on a bank. “If you look at Morgan Stanley , the trade has been to buy every dip this year. Why? Because the stock moves higher on every dip subsequent to when the bad news comes out,” he said.
Unfortunately this trade left Terranova weeping all the way to the bank. Since his call shares of Morgan have plunged 10%. So what does he have to say for himself?
Morgan is having trouble at $30, but I still like it, says Terranova.
Tim Seymour
On August 19th The Ambassador thought a fertilizer company was well positioned for growth “A company like Potash ,” he said. “They've got this new paradigm where the price of their underlying commodity triples or quadruples.”
As it turns out this fertilizer trade was anything but fertile. Since he said to get long shares of Potash are down about 7%. So what does he have to say for himself?
I'm sticking with this trade, says Seymour. I still believe in it.
In case you're wondering, Guy Adami gets a pass this week.
______________________________________________________
Steve Grasso
On July 20th the Governor thought a move higher in the casino space was nothing but a losing bet. At the time he said, “Hold back on MGM , LVS and other casino stocks purely on technical basis. I think you've got to hold back on the casino names."
As it turns out Lady Luck was not smiling on this trade. Over the last month shares of MGM are about 7% higher while Las Vegas Sands soared nearly 40%. What does Grasso have to say for himself?
We've seen a nice rally in almost every stock since that time, he says. I'd still stay away from casinos.
Joe Terranova
On August 6th The Liquidator turned bullish on a bank. “If you look at Morgan Stanley , the trade has been to buy every dip this year. Why? Because the stock moves higher on every dip subsequent to when the bad news comes out,” he said.
Unfortunately this trade left Terranova weeping all the way to the bank. Since his call shares of Morgan have plunged 10%. So what does he have to say for himself?
Morgan is having trouble at $30, but I still like it, says Terranova.
Tim Seymour
On August 19th The Ambassador thought a fertilizer company was well positioned for growth “A company like Potash ,” he said. “They've got this new paradigm where the price of their underlying commodity triples or quadruples.”
As it turns out this fertilizer trade was anything but fertile. Since he said to get long shares of Potash are down about 7%. So what does he have to say for himself?
I'm sticking with this trade, says Seymour. I still believe in it.
In case you're wondering, Guy Adami gets a pass this week.
______________________________________________________
Thursday, September 3, 2009
Mosaic Takeover Speculation Heating Up Again
The rumor mill is centered on Mosaic (MOS) again, as there is renewed interest in a possible takeover bid. In mid-July when we first wrote about this topic (Mosaic’s Potash Attracts Vale’s Eye), the rumors originated in a Brazilian newspaper that mining giant Vale SA (VALE) was looking to diversify into potash mines. There was also a side note, that BHP Billiton could potentially have an interest as well. After that double-digit rally in July, a spokesperson from Vale dismissed the possibility of a deal because of concerns it might strain relationships with the government, also saying that they would prefer to grow organically for the time being.
Wednesday, Mosaic is up about 2% even as the rest of the market is selling off. Options trading on Mosaic has been exceedingly bullish today as well with the September $60 calls accounting for about a third of contracts sold.
“Trading in Mosaic Co. options jumped to a six-week high on renewed speculation that North America’s second-largest potash producer will be acquired. The shares climbed as much as 4.8 percent, halting a seven-day retreat.
Volume in bullish call options rose to 92,419, more than quadruple the four-week average and six times the number of puts. Calls give the right to buy a security for a certain amount, the strike price, by a given date. Puts convey the right to sell. The stock gained 1.7 percent to $49.29 at 1 p.m. New York time, after losing 11 percent since Aug. 20.
The most-active contracts were September $60 calls, which more than doubled to $1.25 and accounted for more than a third of today’s trading. A buyer at that price is betting that the stock rises to at least $61.25 before the options expire Sept. 18. The stock hasn’t closed above $60 in 11 months.”– from Bloomberg.com
The Bloomberg article makes the case that the options activity and strength of the stock today is based solely on renewed takeover speculation. If that is the case, with Vale on the sidelines, the likely suitor would by BHP Billiton. At this point neither BHP nor Cargill (majority owner of Mosaic) have confirmed that talks have taken place. However, there is one other possible explanation, Potash’s (POT) CEO Norbert Steiner told Reuters that prices for potash fertilizer are likely “bottoming out”. This would likely give a boost to all potash firms, but Mosaic seems to be getting a particular bounce above the rest.
At this time we are reaffirming our Undervalued rating for Mosaic, and even though lower potash prices have eroded profitability the company still has a bright future. We reject the idea of investing on the basis of rumors, but we believe it is priced attractively so as to attract interest from bidders.
Wednesday, Mosaic is up about 2% even as the rest of the market is selling off. Options trading on Mosaic has been exceedingly bullish today as well with the September $60 calls accounting for about a third of contracts sold.
“Trading in Mosaic Co. options jumped to a six-week high on renewed speculation that North America’s second-largest potash producer will be acquired. The shares climbed as much as 4.8 percent, halting a seven-day retreat.
Volume in bullish call options rose to 92,419, more than quadruple the four-week average and six times the number of puts. Calls give the right to buy a security for a certain amount, the strike price, by a given date. Puts convey the right to sell. The stock gained 1.7 percent to $49.29 at 1 p.m. New York time, after losing 11 percent since Aug. 20.
The most-active contracts were September $60 calls, which more than doubled to $1.25 and accounted for more than a third of today’s trading. A buyer at that price is betting that the stock rises to at least $61.25 before the options expire Sept. 18. The stock hasn’t closed above $60 in 11 months.”– from Bloomberg.com
The Bloomberg article makes the case that the options activity and strength of the stock today is based solely on renewed takeover speculation. If that is the case, with Vale on the sidelines, the likely suitor would by BHP Billiton. At this point neither BHP nor Cargill (majority owner of Mosaic) have confirmed that talks have taken place. However, there is one other possible explanation, Potash’s (POT) CEO Norbert Steiner told Reuters that prices for potash fertilizer are likely “bottoming out”. This would likely give a boost to all potash firms, but Mosaic seems to be getting a particular bounce above the rest.
At this time we are reaffirming our Undervalued rating for Mosaic, and even though lower potash prices have eroded profitability the company still has a bright future. We reject the idea of investing on the basis of rumors, but we believe it is priced attractively so as to attract interest from bidders.
Wednesday, September 2, 2009
Tuesday, September 1, 2009
Today in Commodities: The End Is Beginning
Really it is just the beginning of September, but historically the next two months are not kind to equity markets. Will this year be different? VIX spike and talk of bank failures… I think I would rather be on the sidelines than in a market that has bounced 50% while the circumstances have not justified that type of move, but maybe that is just me. Equities hit today; on this leg we target 975 in the S&P and 9075 in the Dow.
US dollar up 60 ticks now above the 20 day moving average and the Aussie down 160 ticks now below the 20 day moving average. RBA holds at 3.0%. See previous posts.
Oil broke the short term trendline, a trade below $68 should mean a trade lower. This bodes well for the Crude : natural gas ratio but not so good for the recent December $75/80 call spreads purchased for clients. Stay tuned. In natural gas we advised clients to buy back their November $6.50 call spreads today for $300 and to hold the $5.50 calls. Clients are down on the trade, expiration 44 days from today.
Silver and gold traded remarkably well considering all outside markets. We suggest long exposure in silver.
Sugar pared its losses closing down only 15-23 ticks. We still like being long March 10′ contracts. Agriculture puked today with a lot of red on the screen. We had already cut losses on the soybean spread from last week but today was a nail biter for those who stayed with it, as new crop gained 58′4 cents or $2920 on old crop (zsx9-zsu9). We feel a early frost scare is worth having light long exposure in grains, to date we’ve been wrong. Take profit on your October lean hogs but stay with the December for more upside. We advised clients to roll their long December live cattle/ short October live cattle into a long in February and to stay short October. With October being the front month we feel this spread will work better.
US dollar up 60 ticks now above the 20 day moving average and the Aussie down 160 ticks now below the 20 day moving average. RBA holds at 3.0%. See previous posts.
Oil broke the short term trendline, a trade below $68 should mean a trade lower. This bodes well for the Crude : natural gas ratio but not so good for the recent December $75/80 call spreads purchased for clients. Stay tuned. In natural gas we advised clients to buy back their November $6.50 call spreads today for $300 and to hold the $5.50 calls. Clients are down on the trade, expiration 44 days from today.
Silver and gold traded remarkably well considering all outside markets. We suggest long exposure in silver.
Sugar pared its losses closing down only 15-23 ticks. We still like being long March 10′ contracts. Agriculture puked today with a lot of red on the screen. We had already cut losses on the soybean spread from last week but today was a nail biter for those who stayed with it, as new crop gained 58′4 cents or $2920 on old crop (zsx9-zsu9). We feel a early frost scare is worth having light long exposure in grains, to date we’ve been wrong. Take profit on your October lean hogs but stay with the December for more upside. We advised clients to roll their long December live cattle/ short October live cattle into a long in February and to stay short October. With October being the front month we feel this spread will work better.
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