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Deflation Chart: Corn and Soy Have Record Weekly Declines

Agricultural commodities in general and corn and soy in particular declined sharply this week. The market had to digest both the Argentinean government’s capitulation and nearly perfect weather in the Midwest.

CBOT December corn closed at 628.5 ($6.285 per bushel) on Friday, down -20.24% from the all time high close of 788 on June 26, while November Soybeans closed at 1,448 ($14.48 per bushel) down 11.22% from the all time high close of 1631 on July 3, 2008.

CBOT September wheat closed at 804 ($8.04 per bushel) on Friday, down 36.69% from the year’s high close of 1270 on March 12 (40.42% below the all time high intra-day on Feb 27th). Remember that wheat soared in February and March on increased export tariffs imposed in the Ukraine, Russia and Argentina as well as draught in Australia.

Things can change very quickly in this market. We have been very lucky with weather for this corn crop in recent months, but the crop is less mature than it would typically be at this time of year. In recent week estimates placed only 13% of total corn crop pollinating vs. a seasonal average of 50% . If we had any additional bad weather the impact on this crop could be profound, driving total corn yield down by more than the 10% decline estimated by the USDA.

Additionally, the strikes in Argentina took many farmers off their land to work the picket lines and roadblocks, and the threat of heavy export tariffs did not encourage production during the planting cycle. Put bluntly, a lower yield caused by less ideal weather, lower stocks at harvest in Argentina resulting from the strike – or a combination of both, could return pricing pressure into these markets. Proceed with caution.

Andrew Barber
Director

CRB Commodities Index vs. Brazilian Equities

This picture is one that we often discuss in our morning research meetings. The correlation of the CRB Commodities Index to Brazilian stocks.

For the last month, we've been talking about the breakdown in the Brazilian Bovespa as a leading indicator for inflation. After this week's stiff -7.4% correction in the CRB Commodities Index, this positive correlation proved powerful once again. Brazilian stocks sniffed this correction in inflation readings out well in advance of the crowd.

KM
CRB Commodities Index vs. Brazilian Equities

Cuban Sugar: Will Obama Coat The US With Supply?

Joe Conason' editorial in this Saturday's Chicago Sun-Times laid out a theory gaining traction among U.S. liberals - that lifting the Cuban embargo can help open the floodgates for cheap sugar-based biofuels to alleviate skyrocketing energy costs.

I have zero interest in arguing about ethanol science or having a political debate over lifting trade sanctions against Cuba. What I am interested in is what any thaw in U.S./Cuban relations might mean for global sugar production and how that would impact the markets, which for the past year, have been driven by the sprint between surging Brazilian supply and demand.

It's important to remember that Cuba, today an importer of refined sugar, was the world largest exporter and third largest producer as recently as 20 years ago. Back then, total production on the island averaged as much as 7 million metric tons a year as opposed to this year's official (and probably overstated) 1.5 million. Decades with no reinvestment in infrastructure following the collapse of the Soviet Union have left the island's farms and refineries in shambles.

Since assuming power, Raul Castro has been slowly implementing small economic and social reforms leading many to conclude that he may be more open minded towards overtures from the U.S. than his older brother was. Meanwhile, Barack Obama openly indicated his willingness to consider steps towards normalizing relations with Cuba in recent years (although he has been much more tight lipped on the subject since assuming the role of candidate). Obama's real chance at victory in November, coupled with a new flexibility among Cuba's leaders make the end of nearly 50 years of trade sanctions seem like a possibility for the first time.

Regardless of whether Conason is right about the impact of sugar on global oil dependency, the re-emergence of Cuban Sugar exports to the U.S. would certainly recast the entire world market for Sugar.

Andrew Barber
Director
Research Edge's Sugar Chart

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US Market Performance: Week Ended July 18, 2008...

Index Performance:

Week Ended 7/18/08:
Dow Jones +3.6%, SP500 +1.7%, Nasdaq +2.00%, Russell2000 +2.7%

2008 Year To Date:
Dow Jones (13.3%), SP500 (14.1%), Nasdaq (13.9%), Russell2000 (9.5%)

Restaurant Transactions Over the past three years

How many companies on this list will need to raise equity or file bankruptcy in the next 12-18 months?
  • Some PE firms may have bitten off to much!

Where Did All the Free Access To Capital Go?

There was a great article yesterday by Bloomberg’s Jason Kelly and Pierre Paulden titled, “Blackstone Risks Hedge Funds’ Return as LBO Lending Evaporates.”

I have no edge on this deal in particular (or I wouldn’t be able to write about it!), but it appears that The Weather Channel LBO that we wrote about in a prior posting isn’t the lock that the buying consortium originally thought it to be. We’re not talking about a club deal with marginal players here either – General Electric, Bain Capital, and Blackstone.

Suffice to say, my long held view that Access to Capital Tightening as Cost of Capital increases continues to have far reaching effects. While some believe that this is a short term funding issue, and others brush it off as a “confidence thing”, I think this is structural and will have longer term effects than many would like to accept.

Per the article, the facts continue to play on our side of the thesis. “The $153.9 billion of announced buyouts this year is down more than 70 percent from the same point in 2007, according to data compiled by Bloomberg.”

What a difference a year has made to those depending on levered long investment models.
KM
From www.weather.com

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