BofAML Explains Why The Ag Economy Isn’t Likely To Get Much Better In 2017

The fact that farm incomes have come under increasing pressure over the past couple of years should come as little surprise to our readers (for those who missed our latest update, see: “Midwest Farm Bubble Continues Collapse As Farm Incomes Expected To Crash In 2017“).  Unfortunately, at least according to Bank of America’s Global Ag Chemical team led by Steve Byrne, farmers shouldn’t expect a reprieve any time in the near future.

As BAML points out, the grain commodity farmers of the U.S. are locked in a vicious cycle, the result of which is a perpetually oversupplied market.  To summarize the key takeaways, farmers continue to plant so long as cash profits are positive (because depreciation isn’t a real cost and who cares about returns on capital anyway…silly finance people) while yield growth continues to outpace demand growth which leaves markets perpetually oversupplied and commodity prices well below what would be required to provide a normalized profit level for farmers.  Meanwhile, since farmers seem to be incapable of unilaterally reducing supply, an external supply shock (e.g. a weather-related event) seems to be the only hope of the industry ever normalizing again.

With that, here is a little more detail on the vicious ag cycle per BAML…

Yield growth per acre continues to average 1-2% per annum…

Yields continue to improve with no sign of abatement as seed technology improves and farmers utilize better information technology (precision ag) to gain better understanding of acreage and maximize yield potential. While weather can disrupt yields year-to-year, directionally yields have improved at a 1-2% CAGR for corn, soy and wheat since 2000. In our view, this will continue to place deflationary pressure on crop prices longer-term, particularly given the extent to which global yields trail yields in more developed ag economies.

Farms

 

…which continues to drive new record highs in production despite an already weak pricing environment.

Global corn production is similarly heading for a new record high in 2016/17, up 7% YoY and driven mostly by an almost equally big rise in yields. The US 2016/17 crop that was just harvested looks especially strong. Concerns over whether ear filling was impeded by the hot and dry summer weather are now fading as the harvest is done and the USDA revised up its yield estimate by 1% to 11.01mt/ha in November. Meanwhile, in LatAm farmers are currently planting for the 2016/17 harvest and production looks even stronger, up 26% on presumed yield normalization and exacerbated by a 7% increase in acreage.

Farms

 

Meanwhile, global corn demand is expected to recover somewhat in 2016/2017 but no where near the expected 7% supply increase.

Global corn demand growth slowed to just 2% per annum in the past two years, due to a drop in global pork production. Corn is the staple diet of the word’s more than 1bn pigs. The decline in pork production was mainly caused by an environmental crackdown in the Chinese farming sector, and the country’s pork production fell by 3% in 2015 and another 5% likely in 2016.

 

Then in March 2016, China ended its domestic corn price floor, giving relief to pig farmers, and corn demand started picking up again. Corn demand from pig production will continue to rise structurally in the years to come on the ramp-up of new modern mega farms in Northern China. Overall global corn demand can recover to 3% growth this market year (2016/17) and hold up at 2-3% growth annually in the years to come, in our view. However, we have started to see signs of slowing feed demand as elevated corn prices have led to substitution to other feeds, in some instances. Global feed demand levels will be key in determining the aggregate corn demand picture.

Corn

 

All of which is expected to keep global grain stocks at all time highs for the foreseeable future…

World carryout corn stocks are likely to finish 2016/17 at a record high, with stock-to-use ratios up marginally from the year prior. There is debate over the level of Chinese stocks, with estimates ranging from China’s corn reserve estimate of 270Mmt vs USDA estimate of ~110mn mt. The USDA expects Chinese corn production to decline by ~3% in 2016/17, and inventory levels to decline by ~8% in 2016/17 after swelling from 81mn mt in 2013/14 to 110mn mt in 2015/16. Recent policy aimed at reducing production out of lower-yielding regions could also help alleviate China’s elevated inventory position. Media reports have also indicated more than 900 companies have applied for import quotas for 2017, which could be supportive of global prices. USDA data suggests soybean inventories in China remain elevated as well and account for over 20% of global stocks (Chinese stocks to use ration remains well over 100%). China accounts for over 60% of global soybean imports, and thus inventory levels in China are a key factor in gauging global demand expectations. A clear indication of a drawdown in Chinese soybean stocks could provide price support, in our view. Nonetheless, China’s inventory levels, trade data and policy direction will remain key components of corn and soybean prices in the coming year.

Farms

Farms

 

And, of course, as long as cash margins remain positive then farmers keep planting…which doesn’t do much for that weak pricing environment.

Farm income, planted acres of row crops, and commodity prices all peaked in 2012 following the prior decade long super-cycle. Prior periods of ag credit cycle downturns lasted 5 years (68-72) and 9 years (83-91) while ag business cycle downturns have averaged 2 years since 1960. Inflation adjusted crop prices have been declining for over 100 years as gains in productivity (+1-2%) and acreage expansion (0-1%) outpace gains in demand (1-2%). New technologies such as precision agriculture and gene editing could accelerate productivity gains in the medium term. Cyclical upside could occur from increased demand for protein, reduced supply from marginal acres, or a weather event.

 

We expect cash margins for corn, soybeans and wheat to collectively be slightly higher than the prior year, but well below the ~2007-2014 profitability boom amidst elevated prices. We expect crop commodity prices for each to remain low amid elevated global stocks. Profitability will also likely remain a challenge and at similar levels to prior year levels exacerbated by elevated leverage, with US farm debt to net cash income at its highest level since 1984.

 

In our view, cash margins may have room to fall before seeing a rational supply response. Margins are still above breakeven levels that occurred 15 years ago (1999-2003) and not at levels that could drive meaningful changes in farmer behavior, such as walking away from land rent or simply not planting acres in a given year.

Farms

 

But, at least farmers have that whole trade war with Mexico to look forward to…luckily Mexico is just our second largest corn importer…

In our view, the risk of a trade war with key importers of US crops remains a key risk for the US ag economy. Trade with China (14.8%) and Mexico (13.6%) represent top destinations for US ag export demand. Additionally, a potential border adjustment tax could significantly inflate fertilizer prices and together with lower grain prices could further impair farmer margins. Potential reform to the Renewable Fuel Standard is also a downside risk for US growers given 40% of domestic corn demand is derived from ethanol. A stronger USD resulting from proposed policies would also be a headwind for US growers. Washington will remain critical for agriculture with upside risks being the status quo and downside risks being more meaningful.

Farms

Farms

 

It’s pretty rough when your only hope of making money in your chosen profession will come only after a devastating weather event that may or may not force you into bankruptcy.


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Protest is Increasingly Becoming Criminalized in America

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We’re going to have to be increasingly creative in the way we protest “the system” in order for it to have real impact. I think economic boycotts need to be a key tactic in this battle, particularly since the paradigm we live under is so singularly focused on the accumulation of more and more wealth and power in the hands of the few. We will need to identify those corporations involved in the most egregious practices against our best interests, and refuse to engage with them in any sort of economic relationship whenever and wherever possible…

Read the rest here.

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Former IMF Chief Sent To Jail As Spain Prosecutes 65 Elite Bankers in Enormous Corruption Scandal

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Former IMF Chief Sent To Jail As Spain Prosecutes 65 Elite Bankers in Enormous Corruption Scandal By Matt Agorist , published on Activist Post, on February 26, 2017   In many other countries, excluding the United States, corrupt bankers are often brought to task by their respective governments. The most recent example of a corrupt

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Up-Ending The Fed – Can Trump Reshape The Most Powerful Central Bank In The World?

Via Danielle DiMartino Booth of DiMartinoBooth.com,

“Remember Red, hope is a good thing, maybe the best of things, and no good thing ever dies.”

Wiser words were never spoken on the big screen than those of The Shawshank Redemption’s main character Andy Dufrense. We are none of us beyond redemption, so we are taught by this banker from Maine, even when we are punished for crimes we did not commit. In briefly researching the movie, one comes to learn that it is based on Stephen King’s 1982 novella Rita Hayworth and Shawshank Redemption. No doubt, Hayworth’s role in the movie stands out in all our minds, which is saying something as the superstar was no longer with us.

Dig deeper and you learn that King’s longer than a short story, but shorter than a novel, was part of a series called, Different Seasons, subtitled Hope Springs Eternal. How reassuring if enigmatic. More perplexing still is this master of the horror genre’s inspiration — Leo Tolstoy’s God Sees the Truth, But Waits. It would seem that Carrie has met Anna Karenina.

Clearly, it’s easier to judge those who write books by their most famous covers. But why not set such preconceived notions aside. You too can bask in King’s gorgeous prose from Shawshank and even Tolstoy’s beautiful words of inspiration: “If you want to be happy, be.” And redemption: “Everyone thinks of changing the world, but no one thinks of changing himself.”

These words resonate so against the backdrop of a country that remains intent on fomenting division, on splitting itself at the seams, bent on self-destruction. Perhaps it will have to come down to one man and his ability to change himself, to draw in more than his avid followers but his doubters as well.

For yours truly, it has thus been curious, nay fascinating that on matters of the Federal Reserve one Donald J. Trump has been silent as a mouse whose paws cannot bang out 140-character rants. Perhaps, just maybe, he is busy doing late night reading on the foundations of this venerable institution. If that’s the case, maybe he came across this little gem that was passed along recently:

“In selecting the members of the Board, not more than one of whom shall be selected from any one Federal Reserve district, the President shall have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country.”

Maybe that’s why the media has begun to dispense with the labels “hawk” and “dove” and is beginning to replace the aviary with simple human beings who have been there and done that, who have been on the receiving end of Fed policy for their entire careers. Take this from Kate Davidson at the Wall Street Journal:

“After his campaign criticism of the central bank’s low-interest-rate policies, many observers speculated he would seek more “hawkish” candidates who would favor higher borrowing costs. But his choices may be driven less by these issues and more by their practical experience, judging from his early picks for other top economic policy posts in the administration—drawn from investment banking, private equity and business—and the pool of early contenders for the Fed jobs.” 

Meanwhile, the Financial Times’ Gavyn Davies had this to say:

“The last four Fed Chairs have all been clearly on the economist side of the line, and because they have all bought into the Fed’s economic orthodoxy, their actions have been considered somewhat predictable by the markets. A business person or banker might be less predictable, at least initially, and more prone to shake up the Fed’s orthodoxies, for good or ill.”

With deference to Mr. Davies, there can be no ‘for ill’ in shaking up the Fed’s orthodoxies, if you can call them that. Orthodoxy, from the Greek word orthodoxia, implies officials are cleaving to a correct creed. But what if policymaking has devolved from correct to simply accepted?

That would imply a good dose of heterodoxy, also Greek from heterodoxos, was in order, as in a departure from the official position. To be crystal clear, heterodoxy does not equate to heretical, from the Greek hairetikos, (pardon the digression but who gave the Greeks a monopoly on multisyllabic, cool words?). Even so, a bit of heresy would also do the Fed a world of wonders. The literal Greek translation means ‘able to choose.’

A recent study determined the study of economics in academia had itself become incestuous with a great preponderance of students being trained in the same school of thought. This determination was not only disturbing and dangerous, it demands politicians introduce a bit of heresy into our nation’s central bank.

Perhaps President Trump, his administration and all members of Congress should sit down for a tutorial on Heterodox Economics (nope, not making that one up), which refers to schools of economic thought which fall outside of mainstream — read Keynesian – economics, which is predictably referred to as orthodox economics. Maybe, just maybe, it’s high time a variety of schools are incorporated, as in the post-Keynesian, Georgist, social, behavioral and dare say, Austrian approaches.

That last one, the Von Mises-inspired Austrian school of economics is apparently public enemy number one. The FT’s Davies goes on to warn that some candidates up for those open and opening positions on the Fed’s Board of Governors are ‘Austrian’ economists, a school that has apparently influenced Vice President Pence. An “Austrian” candidate would certainly alarm the markets.”

Davies has apparently done his homework. Back in 2010, one Mike Pence was serving in Congress as a representative of Indiana. In response to the Fed’s insistence on launching a second round of asset purchases, which the markets adoringly embraced as QE2, he blasted back that, “Printing money is no substitute for pro-growth fiscal policy.”

Pence’s words certainly ring Austrian, as the school considers malinvestment to be a menace, as well any rational person would. Malinvestment (we can finally score one for the Latins!) is defined as a mistaken investment in wrong lines of production, which inevitably lead to wasted capital and economic losses, subsequently requiring the reallocation of resources to more productive uses.

And we wonder why we’ve had such a long run of jobless recoveries that happens to coincide with the post-Greenspan era. Why would the markets abhor an Austrian? Clearly, we would not have starved productivity by overbuilding residential real estate in the years prior to the crisis. Nor would companies have gorged on record share buybacks in the years that followed. Agreed, these phenomena juiced returns. But to what end aside from protecting the legacy of the mythological ‘wealth effect’?

As my dear friend Peter Boockvar wrote of the wealth effect in response to the Fed’s meeting minutes from its January meeting: “The concept, invented by Alan Greenspan, and carried on by Mr. Bernanke and Mrs. Yellen, is the unspoken third?mandate of the Fed. Well Fed, you certainly got what you wanted in terms of a dramatic rise in asset prices over the past 8 years (just look at the value of equities relative to the underlying US economy) but a wealth effect did not happen if the pace of personal spending in this expansion is any indication. For many, it’s the wages they earn and the savings they keep that drive spending decisions, not the value of their stock portfolios.”

For taxpayers’ money, because they will pay in the end, it would seem we need Peter to fill one of those vacancies on the Fed’s Board. Just sayin’. Would the man who coined the term, ‘monetary constipation’ to describe the, “constant hemming and hawing over a rate hike…even in the face of a world that clearly changed on November 8th? and as we approach the 8th ?year of this expansion.”

President Trump, can you hear Peter?? This is not the time to be obtuse. This is the time to bring back the good things in life, beginning with the best – hope. Dig as deep as you can and ask yourself some probing questions. Can you stand up to the orthodoxy that’s robbed the business cycle of its very cyclicality? Are you man enough to populate the Fed with leaders who are so strong there’s no need to audit the out-of-control institution? Pray God, does Mike Pence have your ear? You may be a debt kind of a guy, you’ve said so yourself. But you’re also beholden to no one and have a once-in-a-century opportunity to reshape the world’s most powerful central bank and in doing so safeguard the sanctity of the U.S. dollar.

As Andy Dufrense explained to us all, “I guess it comes down to a simple choice, really. Get busy living or get busy dying.” It’s time we got back to the business of living in this country, every single one of us. Who are we to question if it takes a heretic to get us back to where we need to be?


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Energy, Money, and the Destruction of Equilibrium

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I see many economists and entrepreneurs as opponents even if that is not the intention of the economists. Academic economists are most needed by those who have power and want to keep it. Multinational corporations, banks, and governments. The last thing those entities want is disruption, their principal and interlocking goals are stabilization and optimization of the existing order. They have an incentive to “optimize” the current system and extract rents.

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Judge Orders California To Release Papers Discussing Risk Of Cellphone Use

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California could have to hand over some documents on cellphone use it tried to keep under wraps. On Friday, a Superior Court judge ordered the state to release papers discussing the possible risks of long-term cellphone use.

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James Woods Blasts John Podesta For Pizzagate Scandal

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James Woods Blasts John Podesta For Pizzagate Scandal by Sean Adl-Tabatabai, published on Your News Wire, on February 22, 2017       Hollywood actor James Woods has publicly condemned Hillary Clinton campaign chair John Podesta for his involvement in the child sex scandal known as Pizzagate.  In an astonishing Tweet, the actor suggested that Podesta

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Gas Taxes Set To Surge In Roughly A Dozen States

Nearly 20 states have raised gas taxes or recalculated gas-tax formulas in recent years to generate additional revenues.  Which, of course, is an extremely politically expedient way to raise taxes on the unsuspecting masses since when gas prices soar later those price increases can simply be blamed on those evil oil corporations.

As the Wall Street Journal points out, the ease with which higher gas taxes have been passed through state governments over the past two years have emboldened at least a dozen more states, all of which are now actively considering additional gas taxes.

Tennessee Gov. Bill Haslam is putting his fellow Republican lawmakers to the test, with a plan to raise the state’s gas taxes for the first time in nearly three decades.

 

In Alaska, Gov. Bill Walker, an independent, proposed tripling the state’s gas tax to 24 cents a gallon by 2018. The state has the lowest gas tax in the country and hasn’t raised it since 1970. In his recent state of the state address, Mr. Walker said he is trying to deal with a $3 billion fiscal gap, after state revenues collapsed by more than 80% from four years ago due in large part to the drop in oil and natural-gas prices.

 

New Jersey’s Republican Gov. Chris Christie raised the state’s gasoline tax last year by 23 cents a gallon, his first tax hike in two terms as governor, which he offset with some other tax reductions.

 

On Thursday, the Republican-dominated Indiana House voted 61 to 36 in favor of increasing the state gas tax from 18 cents a gallon to 28 cents with annual adjustment increases possible through 2024. The bill now goes to the state Senate.

In yet another map that looks eerily similar to the 2016 electoral college map, here is where states currently stand on gas taxes.  Of course, the irony here is that the ultra-liberal states of the Northeast and West coast have the highest gas taxes…and while that might play well with their global warming narrative, gas taxes are among the most regressive forms of tax as they disproportionately impact lower-income families.  And unfortunately, unlike the cost of other goods and services that are driven to artificially high levels by misinformed government policies (did someone say Obamacare?), we suspect you’ll never see the leftist states of America subsidizing gasoline for poor people.

Gas Taxes

 

Despite serving as an easy scapegoat, as the U.S. Energy Information Administration notes, only 48% of the price that Americans pay at the pump actually goes to the evil oil companies for crude production.  Meanwhile, on average, nearly 20% of gas costs get sent to various federal, state and local government entities with the highest taxed states like PA, WA, NY and CA collecting even more.

Gas Tax

 

But, higher gas problems aren’t a significant long-term threat because everyone will just buy an $80,000 Tesla, right?  And, for those reading this post from the state of California please continue to ignore the fact that your Tesla is fueled by coal…


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Boston Dynamics Unveils Its Latest “Nightmare-Inducing” Robot

One year ago, when we showed readers the SkyNet-like robots produced by Boston Dynamics, a company acquired by Google in 2013 (which then tried to flip it to Toyota last year but reportedly failed)  we called the robotic creations “terrifying.” Little did we know that compared to Boston Dynamics’ next spawn, that particular batch was downright Johnny 5-friendly by comparison. Because after being briefly shown off at an event early this month, the robotic designed has officially revealed its latest creation, “Handle,” which the company’s founder previously described as “nightmare-inducing.”

Four weeks ago, Boston Dynamics – which is best known for its bipedal and quadrupedal robots – revealed it had been experimenting with some radical new tech: the wheel. The company named its new wheeled, upright robot is named Handle (“because it’s supposed to handle objects”) and looks like a cross between a Segway and the two-legged Atlas bot according to the Verge. Handle, which had not been officially unviled yet, was shown off by company founder Marc Raibert in a presentation to investors. Footage of the presentation was uploaded to YouTube by venture capitalist Steve Jurvetson.

Creating a more efficient robot that can, pardon the pun, handle basic tasks like moving objects around a warehouse would certainly be of benefit for Boston Dynamics. Although the company has consistently wowed the public with its robots, it’s struggled to produce a commercial product that’s ready for the real world. That may soon change.

Raibert described Handle as an “experiment in combining wheels with legs, with a very dynamic system that is balancing itself all the time and has a lot of knowledge of how to throw its weight around.” He added that using wheels is more efficient than legs, although there’s obviously a trade-off in terms of maneuvering over uneven ground.

“This is the debut presentation of what I think will be a nightmare-inducing robot,” said Raibert.

He wasn’t kidding: as the video below reveals, Handle is officially about 6 foot 5, weights about 100lbs, and can roll around at around 9 mph, while preserving perfect balance and even engaging in complex aerial acrobatics: Handle can keep its balance over rough terrain, and can even jump 4 feet in the air, as well as going down stairs without an issue.

While we are confident Amazon will promptly order a few thousands of these to bring even more streamline automation and efficiency to its behemoth warehouses while putting countless part-time workers out of work, we don’t know if to dread or yearn for the moment when RoboHandle emerges in a quiet patrol of your neighborhood street, armed and ready to use lethal force, and gradually replacing the local police force around the country.


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