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Rich Posson: For dairy, production and price don't correlate

By Rich Posson

Ag Financial Strategies Inc.

Milk production peaked
relative to a calendar seasonal-trend and at a record level during the month of
May. Monthly per cow production has also turned lower and with the humid and
extreme climate of summer, it should be considered there is chance for more
than the seasonal percentage decline of production.

The models for the most part
have been bullish milk price for 2010 and until recently it was difficult to
see evidence of a correct opinion. Trade had been sluggish and still made too
big of a deal of poor economy news and seemed to ignore positive news. The
trade made too big of a deal of the high milk production relative the economy.
I have not revaluated an old study of production and price correlation, but
years ago, I found near zero correlation of monthly milk production to monthly
milk price and relative 6 months in the past to 6 months in the future for a 12
month span and this relative a decade or more of data. Zero correlation means
production and price have nothing in common, they are random. So why the do we
make such a big deal of production data. 
Demand is the more powerful aspect the free market equation and subject
more to humanistic persuasion than fundamental or economic input. The models are
currently bullish milk relative an intermediate intra year trend, expect some
consolidation soon and then still higher later this year.

I was recently a part of a
milk market discussion group that wishes to remain anonymous and concluded the
government should consider revaluation of all big businesses as to whether
these are too big relative the desired US economy and free market system. In
addition, milk does not seem to be a quality free market and so the US should
consider elimination of current backward looking price formula and move toward
a forward looking and more usual free market system. It may be impossible but
the best method would be to force all milk to be sold on a national exchange
and from the moment of acceptance from the producer. In addition, the US should
consider forcing all businesses who pick up  milk from the farm to report the amount received with a
daily deadline and daily online publication to the public, albeit a small fee
could be charged to lower government cost. This would allow the free market
system to have more timely and accurate information and could be a step toward
a national system.

Feed cost

The models purchased corn
the day before the end of month of June USDA grain reports, which turned out to
be a pleasant bullish surprise. It is unusual for me to be that brave the day
before an important report and more so when the previous trend appeared to be
turning straight down. I even 
recommended  producers to
exit all shorts, while the buy side was of a modest sized position. The models
turned short term bearish the day before the July monthly crop report and
returned to bullish a few days later and following a decline and before the hot
dome of fear weather rally. Last week, the models made a late intermediate
trend bearish call and ahead of the trigger of a bearish head and shoulder
chart pattern. My guess is corn rallies short term, but August will likely be a
corrective month against a long term bull market trend higher into 2011. The
balance sheet is too tight, there is trouble with crop production in some European
countries and China corn futures recently challenge all time highs, there is no
reason to expect a large drop in price relative a good crop of corn.

 My climate models had called
for a warm and dry summer 2010 (a return to global warming trend) and the warm
part has been proven correct, but the dry part of the forecast is only correct
for some regions as a fair portion of the corn belt remains wet. The climate
models warn of crop weather trouble now to 2012 and perhaps to 2014. A cyclical
corn production models warns that from 2010 to 2014 and more likely no later
than 2012, US corn production is due for the second largest decline to be
experienced in one's life time. 
Clients were presented with details that include the potential for the
past 15 years of weather as helping production more than we may realize and
this relative improved hybrid seeds and farm management and so I have presented
potential new performance statistics.

The last model purchase of
soymeal (intermediate and larger trends) was made in June. A short term hedge
program out performed the grains this year. Although there may be consolidation
during August to September, the best model assessment suggests the long term
price trend is up into 2011.

Stock market

The models called a long term
3yr business cycle trend top for the stock market during the month of April,
but one should be cautious of making too much of the use of “long term” in a
bearish manner as the models show larger cycles are bullish the stock market to
2012 and several years beyond for still larger trends. My guess is there is
extremely low probability for a crash and I still believe a buy of life time
occurred at the 2009 low. I still hold stock funds of Russia, China and Brazil
and I am comfortable with holding these for years to come. I exited US long
term and intermediate term positions with sizable gain and now expect to trade
short term until the next long term bottom of the 3yr business cycle. I believe
there is the possibility the lowest price of the DOW stock index had been seen
( current low of this year), but I doubt stocks can rally far when the 3yr
cycle has not yet bottomed. The stock market ran ahead of the recovery of the
economy and as I expected and now consolidates as the economy catches up.

Economy

The stock market peak of
2010 was not the usual leading indicator in relation to the economy or at least
by my best measurement, that is the ISM manufacture index that peaked the same
month and apparently for the same type of cycle –3yr business cycle. The index
is still in positive territory suggesting economic growth, but at slower pace
than the first four months of this year. 
My research suggests chance this indicator will bottom before or by year
end, which may suggest an unsual bottom ahead of the stock market or in fact
the stock market cycle bottom will occur at a higher price than the low of
2010. The Posson Economy Trend indicator (made from the ISM manufacture index)
bottomed in July of last year and I assume that that turning point was the end
of the recession, although lingering effects can occur for some time. This
indicator made a new record high as of June of this year and so the recovery is
over and the country is in a boom trend, but with lingering complications, slow
pace and the model forecast calls for 2011 to 2012 to be better economic growth
years than 2009 and 2010.

The status of the Grand
Trend.

I recently gave a market
presentation to a group of more than 100 commodity professionals. The
presentation gave the usual speak of the most important model trend signals
during the course of a year that can be used for price risk management by the
producer or consumer and including inventory management. Following this
discussion, I presented the concept and outlook of the much larger long term business
cycle trends.

The markets are within a
bull market that began in the 1930's for stocks, commodities and the economy in
terms of nominal GDP per capita and this trend is to last to the 2030's. It may
end a little sooner or a little later and not all markets or economies will
peak at the same time. This trend should compare to similar trends during the
1500's (the Renaissance) and the 1700's (start of the US and another industrial
revolution) and I have learned the current trend meets similar price performance
and the amount of time in trend for some commodities. This trend breaks down
into phases of the 1930's to 1940's and the 1950's to the 1970's and a phase that
began in the 1980's came to an end during the 2000's. The US has left the
starting line for a new phase and so there will be change, no chance for otherwise. I remain bullish the super long term trends with inputs of population
growth, more capitalism and capital, rising democracy and consumerism. The net
result is increasing demand for commodities.

 

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