Winter wheat conditions are now rated 53% in “Good-to-Excellent.” Most all states showed improvement on the week: MO jumped the most up +6%; CA improved by +5%; TX +4%; IL, IN +3%; OK +2%; AR, KS, OR, SD +1%; CO, ID, MI, MT and OH all unchanged. Keep in mind, despite improvements in each of the last four weeks, conditions are still about -5% worse than last year at this juncture. States on the week seeing conditions get a bit worse were: NE -1%; WA -3% and NC -9%. The USDA also reported the winter wheat crop at 90% “emerged”, which is about right on track with our historical average.
Global debt markets have become an increasing concern for investors as corporations have bulked up their borrowing in an environment of cheap money thanks to low interest rates. According to the Financial Times, 99 companies have defaulted on their debt so far this year. That number has been exceeded only once – in the midst of the financial crisis when 222 companies defaulted in 2009. Of the 99 defaults, 62 have been U.S. companies, largely comprised of companies in the struggling energy sector. One of the most disturbing stats – since 2007, the proportion of corporate bonds that the S&P rates as speculative-grade, aka “junk”, has risen to 50% from 40%. Analysts are worried that rising U.S. interest rates could raise the default rate even higher. Keep in mind that higher interest rates could also stymie the borrowing binge by all corporations, which could mean fewer shareholder friendly perks such as share buybacks and dividend increases. This is just another example of the changing financial landscape that investors need to be aware of as we move forward.
As you can see in the 5-Year chart below, soybean prices are certainly trading at the bottom of the barrel and visually appear in danger of falling into a temporary abyss. I’m hoping the bearish headline trade spinning off the Argentine election is short-lived and doesn’t push us over the cliff. Longer-term I believe there are some bullish possibilities and cards being placed in the deck, but as I’ve been saying, I don’t see those headlines gain much traction until the early to mid-2016.
Argentine exit polls predict conservative opposition candidate Mauricio Macri is their new President. As you probably both know and understand, by Macri defeating the current leftist ruling party candidate Daniel Scioli there could be BIG CHANGES on the horizon. Most inside the trade believe this “change” will be supportive of the agricultural community as Macri looks to eliminate or drastically reduce the current taxes and tariffs being placed on farm productivity. From what I understand, the new president is saying he will cut the 20% export taxes on wheat and 23% export tax on corn frilly quickly and all at once. I’ve heard the 35% export tax on soybeans will be lowered by 5% per year. As many in the trade have been pointing out the past few weeks, this could bring about a few more acres as an overall more optimistic view regarding agriculture is presented. I personally doubt the market will dwell on this theory for very long, but we could certainly see a bearish knee-jerk lower on the headlines and confirmation of a Macri victory. I actually believe if you play it forward a few more steps, the recent election results could end up being a longer-term bullish headline. Think about it like this… If Macri follows through with most of his campaign promises you are talking about massive change for Argentina. Change that could be extremely painful for the masses and create huge social unrest. Anytime a country drastically cuts taxes and tariffs, essentially decrease government funding, they are forced to immediately reduce spending, in turn many social welfare programs grind to an immediate halt. In other words winning the election is just the first step for Mauricio Macri, governing and leading the masses will be a bird of an entirely different color. Keep in mind he still faces a Peronist majority in the Senate, has no control of the House, and has to live with outgoing President Cristina Fernandez de Kirchner’s central bank governor, Alejandro Vanoli, whose term runs through 2019. I’m happy that Argentina is trying to take steps in the right direction…. I just think the “change” is going to create some serious hiccups and ripples in the months ahead.
Guy Spier, The fund manager for Aquamarine Fund, and author of “The Education of a Value Investor” which I highly recommend, recently penned a great passage, “Adversity in investing, as in life, is a certainty. The writings of Marcus Aurelius — who was also the subject of the popular movie Gladiator — taught me that the real question is how we will handle this adversity when we eventually encounter it. Amid the turmoil of the financial crisis, his writings were a constant companion, teaching me that until adversity comes along, our virtues are theoretical. It is only when we actually have to act courageously, honestly and with forthrightness that we get to prove that we have those virtues in reality, instead of merely aspiring to have them. We would all prefer not to deal with adversity. But if and when it comes, it’s an important opportunity. For his part, Sir Ernest Shackleton succeeded in getting all of his men home safely from the Antarctic — despite horrendous conditions and his own grievous misjudgments and mistakes. Misjudgments and mistakes, like adversity, are inevitable. If I handle them the way Shackleton did on his great voyage, we will be much better off. Likewise, Thomas Edison made a virtue of his failures, famously stating that he would continue to fail to make an electric light bulb until he eventually succeeded. Nobody likes to fail, any more than they like to be tested by adversity. But people who learn their lessons, pick themselves up and keep going, have earned the right to consider themselves truly successful. I very much intend to be a part of that group.” You can read the entire Aquamarine Funds 2014 Annual Report and Guy Spier’s Letter to Investors HERE