Market Commentary from Kottke Commodities – Commodity Capital CTA – Kenneth Stein

kottke-Logo-300x61Surprisingly strong grain and oilseed prices in recent months bring to mind a joke: One man inquires of another, who’s on hands and knees beneath a streetlight, “Have you lost something?” to which is answered, “My contact lens.”  “Where did you lose it?” asks the one. “Over there,” responds the prone, while pointing afar. “Then why are you looking here?” “Because the light’s better.”

It’s common among analysts in every field to search for causality in the most convenient venue and time-frame. Yet grain-futures strength has occurred in seeming defiance of the usual fields of data, which feature oversupplied USDA domestic and world balance sheets, bearish crop weather in South America, a transparently negative upsurge of U.S. dollar exchange rate, and evidence of slowing economic expansion, even contraction in some nations recently considered avatars of world growth.

The prime mover of futures markets is not today’s known facts but forward expectations. Current abundance of supplies, healthy status of developing crops, shift of comparative advantage to non-dollar countries, slowing growth – all are known facts. That futures prices are strong thus speaks to another cause. However weak the world economy, emerging Asian economies whose food imports are growing are healthy relative to emerging Western Hemisphere exporters whose governments’ revanchism or mismanagement threatens their forward viability. In this sea of worrisomely regressive political development, the U.S. stands as a dependable, flexible island of food availability.

Expansion in demand from Asia continues apace, including from unlikely sources. Recent buyers of U.S. soy, whose high cost is a marker for increasing meat-industry sophistication and healthy growth in consumer income, include Bangladesh, Pakistan, Vietnam, and Thailand.  China, which dominates world soybean trade but participates little in feedgrains, shows signs of change. It maintains an above-world corn-price subsidy to encourage uncompetitive domestic growers, necessitating lofty import barriers. Domestic meat producers anxious to obtain cheaper foreign-produced feed ingredients circumvent corn-import restrictions by buying substitutes such as grain sorghum (milo) and DDG, the byproduct of corn-ethanol production. This year China has booked virtually the entire U.S. crop of milo, and it officially dropped the major technical barrier to purchases of DDG. As the U.S. ethanol industry produces about 40 mln mt of DDG annually, that appears to finally open the door to China as a growing influence in the corn market.

After statistical review of 2014 trading and results, the Commodity Capital managers have determined to increase risk exposure as trade success permits. In the latter half of 2014, our success rate was positive but market events were so unorthodox, per above, that in retrospect we were too tentative.

Also, several times we exited well-performing carrying-charge arbs only because one leg was about to enter its “delivery” period. By doing so we missed price moves that were our specific objectives. We propose to modify past policy of eschewing overnight positions during expiration, to permit us to do so for a few trading sessions. This would occur only when we rate odds of taking delivery at almost nil, only for a few days while liquidity remains adequate, and would include further precautions. The risk to investors is a potential increase in margin requirement for one night and potentially over a weekend or three-day holiday. The probability that we would ever take delivery is low, but should it occur liquidation would be prompt. We invite investor comment on this item.