Top Traders Give a Rare Inside Look...
Dec 19, 2011
I was in Chicago Friday and Saturday attending Christmas festivities with several of the industries top traders. I thought I would take time to pass along several of the more interesting thoughts and comments I heard circulating and what the trade seems to be focused on moving forward.
• Europe - As if I needed to tell you this one. Many traders are concerned about the influence EU now has on all US markets. Many insinuating Mario Draghi (current President of ECB) is affecting the markets more than Ben Bernanke. I would have to agree. Simply consider last week's comments by Draghi that the ECB was going to be more involved in the EU bailout, within less than five-minutes the US stock market rallied over 1%. Later, Draghi commented that the ECB will NOT be increasing their bond purchases (essentially erasing any thoughts of additional EU quantitative easing), and the US markets fall 3% in less than five-minutes. It used to be the "opening" of the US stock market was the most influential event of the day, now it seems to be the "closing" of the European market is the most influential. Just look at CNBC who has recently added a new closing bell that signifies the "European Markets Are Now Closed." Be on your toes today as Draghi is scheduled to speak before the European Parliament right around 9:30am CST. Hopefully he won't say anything too extreme.
• MF Global - The trade seems to be extremely nervous about the overall long-term affects and "black-eye" the MF Global debacle has recently placed on the entire industry. Most seem to believe 100% of customers funds will "eventually" be returned. Biggest fear is how much collateral damage has been done and how long it will take to repair overall faith in the system.
• European Banks - Many in the industry are highly concerned about continued "risk-off" type action in the coming months from the European banks as they try and increase their overall liquidity. Most talk circulating around the French Banks, and the huge problems ahead if the EU situation begins to unravel.
• Chinese Growth - Most seem to be thinking China is in for a little set-back, some seem to believe China is in for a massive set-back. Overall consensus is something has gone strangely awry in China. The current real estate bubble may end up being much larger than many are anticipating. The almost certain EU recession is going to continue to weigh on the Chinese economy, the only question is how deep and how far will this set China back. There was some talk that Chinese soybean imports may pick up in the next couple of months, but with extremely poor crush margins and thoughts of a deeper economic slowdown around the corner the odd's seem to be in question. Since China has been the main driver of overall commodity demand the past few years, most everyone I spoke with seemed extremely concerned about the industries top customer taking a little break.
• Global Supplies - Most everyone seems to be concerned about the fact extreme Agricultural prices have prompted producers to increase production around the globe. Several pointing out world corn production is projected to set another record. Not only was this years world corn crop a record, but now many are thinking the world will produce another 40-50 million tons on top of that next year. Several also pointing out world wheat supplies have increased in each of the last three years, and this next year should be no exception, with a new record in world wheat supplies. As I have mentioned several times increasing global competition is becoming a major concern. Traditional US buyers are finding alternative sources for grain. Some laughs and chuckles broke out when one trader indicated he heard from reliable sources that Japan had gone as far as recently buying a few shipments of corn from Romanian... The take-away was the crowd is certainly concerned about growing "global supplies."
• US Grain Production - With higher inputs and increasing cash rents thoughts are farmers will be forced to plant corn from fence row to fence row. Talk of a potential massive US corn crop coming in 2012 has the "bulls" of last year extremely concerned about a repeat performance. After two years in a row of poor yields the trade seems to be having a tough time digesting a third is possible. With an average yield of 163 to 164 and close to 95 million acres planted, we could be looking at well over 14 billion bushels and a 2 billion plus carry. Yes, weather will be the key, but recent technological advancements seem to be making it tougher and tougher to adversely impact yields. Some worried that an ideal growing season could produce yields well beyond what have been estimated. Meaning we really haven't' seen what type of production can be produced as of late because of the poor growing conditions.
• Global Weather - Though very unpredictable and short-term in nature there were several conversations and concerns about South American weather. Most inside sources acknowledging abnormally dry conditions, and some thinking dryness may continue for a couple of more weeks. In fact the dry conditions have moved many of the "bears" to the sideline or have some even looking for the market to price in premium until the precipitation increases. Small talk abut Australian rains increasing global feed wheat supplies and hurting higher protein supplies. Some light talk and concern about dry conditions in Ukraine and Russia that may start to appear in the news wire a little more often. Most noting Chinese growing conditions have been adequate and of no current concern. Overall, the weather in South America is certainly a concern, but most are thinking it is still a little too early to get overly optimistic about a major sustained price rally.
• Global Demand - As "demand" was the hot topic this past summer it has quickly found itself on the back burner. Many of the larger traders seem to be questioning the likely hood that global "demand" will be able to outpace the increases in global "supply" next year. With most all analyst and investment firms now downgrading global growth for most all of the larger nations, the thought of "demand" being as robust as once estimated is quickly waning. Many believe US ethanol usage may stay around current levels, and for the first time in years NOT dramatically increase. Also several talking that world feed usage numbers currently being used by the USDA may be drastically overstated, especially if the global economies take a turn for the worse on the EU issues.
The consensus and overall feeling is that the world can NOT afford $8, $7 or possible even $6 corn. "Money-flow" has once again proven its power to manipulate the minds of many, but the often "hypnotic voodoo" it can render is being broken by a strong dose of "reality." Without major supply side glitches, the world simply can not afford prices at the recent extremes. Yes, demand is growing, but as the world and more importantly investors see the profits that have been made in Agriculture as of late, more and more production is coming online.
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