Russian exports, of around 1 million metric tons of agricultural commodities, primarily grains such as wheat, have been delayed in the past month because freezing temperatures at ports in the south have prevented ships from reaching berths, shipping executives and traders said.

Some ships already loaded with grains are also unable to leave for their destinations, they said.

“The figure includes the grain stuck in both shipping vessels which are already loaded and the volume lying in the port warehouses,” Talibov Said, president of South Sea Port near Azov, said on the sidelines of an international grains conference here.

Russia is one of the world’s largest exporter of grains and oilseeds, and almost all its shipments take place from the southern ports. The delay in exports is one of the reasons for firming up of global prices in recent months.

Usually parts of rivers are frozen for a while in winter but it is unusual for Azov Sea waters near southern ports to turn into ice, said a Moscow-based cargo surveyor.

The smaller ports around Azov cater to importers in Turkey, Israel, the Middle East and European Union with cargoes of up to 5,000 tons each. The South Sea Port alone handles cargoes of around 50,000 tons monthly, at present mostly wheat.

Many ships are unable to reach berths, and exporters are resorting to force majeure, said Karina Nor-Arevian, head of South Sea Port’s legal department.

The weather is expected to improve only after mid-March, when the usual grain-loading operations can resume, Nor-Arevian said. There are at least six ports in and around the city of Azov in southern Russia’s Rostov district, with a total annual cargo handling capacity of close to 5 million metric tons, where operations have gone off-gear, she said.

Cargo surveyors said four ice-breakers are performing the steering operations of the vessels from Azov, Rostov, Taganrog and Yeisk ports, where the backlog is unlikely to be cleared before April.

In the past nearly eight months, Russia has exported close to 20 million tons of grains, at a monthly average of almost 2.5 million tons, but shipments are unlikely to be more than 5 million tons in the rest of the marketing year that ends June 30, or a tad above 1 million tons a month, Arkadiy Zlochevsky, president of the Russian Grain Union said.

The weather isn’t quite favorable for exports but a slowdown is natural during this time of the year, Zlochevsky said.

The supply disruption is temporary, the grain is still there and the backlog will be cleared eventually, Jay O’Neil, senior agricultural economist with Kansas State University said.

The Black Sea is open and deep sea ports of Tuapse and Novorossiysk are operational though there were delays earlier this month, the Moscow-based cargo surveyor said.

China published a draft grain law proposing tough management of genetically modified grains and the “deep grain processing” industry.

The proposed law underscores the challenges posed by plans to approve large-scale planting of GM crops while also remaining sensitive to uncertainties surrounding technologies that are redefining agriculture.

China has been slow to approve GM grains, but also cognizent of the need to leverage new agricultural techniques to improve yields amid a tight domestic supply-and-demand balance.

The Legislative Affairs Office of the State Council, China’s cabinet, said in a statement on its website that it will solicit public opinion on the draft, without specifying when the new law will become effective.

“No units or individuals shall apply GM technologies to the main grain crops [wheat, rice and corn] without authorization,” the draft law said.

In 2009, the Ministry of Agriculture gave safety approval for some GM strains of rice and corn, permitting test plots and paving the way for commercial production.

Projects involving deep processing–the use of grains for purposes other than direct consumption, most commonly associated with production of alcohol and starch–of corn, wheat and rice as raw materials must seek government approval, according to the draft law.

The government will limit the volume of grains consumed by deep processors when necessary, it said.

Deep processors process around a third of China’s total corn output.

India’s wheat exports will likely start in earnest around mid-year, after state-run agencies complete purchases for government inventories, as most farmers would prefer to sell their output at an attractive government-mandated minimum purchase price, a level that exporters can’t compete with, trade executives said.

Traders will likely hold back from making purchases until the government completes its stock-building program, as buying at levels near the government price would reduce the competitiveness exports on the world market, said a senior Mumbai-based trader of an international commodities trading company.

India raised the minimum purchase price for wheat by about 15% to INR1,285 per 100 kilograms (around $260 a ton) in October to increase planting interest just ahead of the sowing of crops. Meanwhile, Indian wheat is being quoted for export around $268-$270 a ton, free on board.

The government is targeting a 12.6% increase in wheat purchases, to 31.89 million metric tons during the fiscal year that starts April 1, which will likely put it on track to complete its buying by the end of June.

India has exported limited supplies of wheat since an export ban was lifted in September, as local prices have been quoted on par with or higher than international rates. Between 450,000 and 500,000 tons of wheat has been shipped from the country to date.

Most of the shipments have been to the Middle East, with a small quantity having also been shipped to neighboring Bangladesh. Around 15,000 metric tons of wheat was being loaded on to a vessel at India’s western port of Mundra for shipment to the Middle East, two senior trade executives said.

Industry officials are optimistic that supplies will be available for export on the back of a record crop forecast for the crop year that ends June 30.

M.K. Dattaraj, former president of the Roller Flour Millers Federation of India, said prices will probably fall below the minimum purchase price in the second half of the year, adding that it is “too early” to forecast the amount of wheat that will be available for export.

The government has forecast 2011-12 wheat output at a record 88.31 million tons, but officials have said the figure could exceed 90 million tons thanks to favorable weather.

Some of the country’s early wheat has started arriving in markets in the western province of Gujarat–no more than 300 tons to 400 tons daily, industry participants said.

The wheat harvest in the country’s breadbasket northern region usually begins in April.

 Debate around budget deficit reduction is likely to dominate the November
elections alongside job growth ideas. With better employment figures of late and
credit conditions indicating some sustained strength being likely in the months ahead,
there may be more emphasis on US government debt and differences between ways to
close the deficit in the face of growing demographic pressures on health care costs.
Forceful arguments will be made to the American people in terms of trimming spending
and higher taxes for both individuals and corporations that investors need to
understand.
 The expiration of the Bush tax cuts and sequestration on spending will force
fiscal reform discussion by year-end. The combination of expiring tax cuts and the
debt ceiling agreement between the White House and Congress last year suggest that
if no new legislation is proposed and passed, the drag on the 2013 economy would be
greater than 3% of GDP, risking a recession. As a result, it seems highly improbable
that this issue will be ignored by economists and investors and there will have to be
some fiscal initiatives put in place.
 Addressing fiscal imbalances could have a very positive impact on market
valuation. Risk premiums have climbed for a variety of reasons but the generally
accepted view of unsustainable government spending growth especially for future US
health care liabilities (as the baby boomers age) argues forcefully that any serious
attempt to resolve the climbing debt problem would allow for risk premiums to slide and
P/E multiples to expand. Given the current bond market pressures on various
European countries to address their fiscal difficulties, one would expect the attention to
shift to the US by 2013-14.
 “Crowding out” contentions on government funding costs or a larger “taxing”
weight on economic trends face the investment community. One could argue that
the need to fund growing government expenditures if they remain unchecked is the big
uncertainty that corporates and individuals see in the future and thus have held back
spending. Indeed, the law of economic utility suggests that people do not spend
money in the current period when they have expectations of needing it later on.
 Growth drivers may also reduce risk premiums. Positive developments in the
energy, housing, technology and manufacturing industries all bode well in the years
ahead and are key ingredients to the Raging Bull thesis initiated late last year. A
restoration of sustained growth would lower market participants’ anxiety as well and
should allow for valuation to improve.

Forget European Fiscal Woes; the US has
Plenty of Its Own Problems

Most investors and indeed most Americans understand that running endless budget
deficits will lead to difficulties down the road especially as the aging baby boomers
lift the demographic challenges of funding rising health care costs. Indeed, as we
have shown various times in the past, the health care burden remains an enormous
liability for the country and drives the long term budget imbalances (see Figure 1)
and the 10-year budget proposal by the Obama administration shows mandatory
spending (which includes Social Security, Medicare, Medicaid and federal
government interest expense) spiking higher beginning in 2014 (see Figure 2).
Thus, addressing this growing problem will need to be done at some point or the
concerns about Europe currently will be coming across the Atlantic Ocean to roost
in the US.

While one can never know for certain, we suspect that the high cash positions held
by corporations (see Figure 3) and the large household deposit figures despite low
short term interest rates (see Figure 4) may reflect the concern about the need to
hold on to money down the road. There may be some fear that either corporate
funding costs go up as the government needs more money to pay for promised
health care benefits causing a type of “crowding out” or taxes rise meaningfully to
pay for these obligations. High interest rates and higher taxes would then also lead
to a more worrisome longer term economic outlook.

In addition, our sense is that the equity risk premium is elevated for various reasons
including worry about tail risk from Europe, Iran, China and peak US corporate
margins, but interestingly, our measure of the equity risk premium (see Figure 5)
has not shifted much with the LTRO in Europe calming down some of the bond
markets’ volatility across the pond. Accordingly, we think that a good deal of it may
be locally derived because of US fiscal fears. And, any movement towards figuring
out a large bargain on the long term budget could prove helpful on market multiples
as risk premiums and P/Es tend to be inversely related (see Figure 6).

While many perceive the idea of addressing fiscal issues during an election year
and or even as some form of political suicide, one has to remember the full bore
cost of allowing all the Bush tax cuts to expire at the end of 2012, not to mention the
payroll tax, extended unemployment benefits and the sequestration spending cuts
agreed upon last year in the debt ceiling accord between the White House and
Congress. Overall, Figure 7 & 8 outline the full impact based on an analysis done
by Steven Wieting, Citi’s US economist, and it gets close to 3.5% of GDP, which
argues that a domestic recession could ensue next year given that kind of abrupt
change. In essence, some movement on entitlement and tax reform most likely will
need to happen by year-end since the consequences of doing nothing are
economically uncomfortable – in this context, the political risk of inaction seems to
overwhelmingly outweigh that of action.

There is good news out there as well in terms of GDP growth drivers in the next few
years as we highlighted in our December 14th, 2011 Raging Bull Thesis report that
one would not want to disrupt . Housing activity looks better (though far from any
booms developing), the US energy sector has some new production opportunities
that are driving employment in places such as North Dakota, the technological
needs from a mobility boom is driving new investment and manufacturing jobs are
coming back to the States as Chinese costs rise due to wage inflation, increased
real estate prices and electric power rates as well as volatile shipping costs. Thus,
not dealing with tax cut expirations and benefit cuts potentially has much deeper
unintended consequences.

There is a belief that risk premiums could jump higher if a new banking crisis
erupted (starting in Europe), if China suffers a hard landing, if something happened
with Iran and the Straits of Hormuz, etc. and while we would never rule things out,
we would note that risk premiums on our calculations are near 30 year highs. Since
1990, there have been many awful circumstances including two US wars in the
Middle East, the Great Recession and September 11th as well as the tech bubble
bursting and several other important and threatening events we have not
mentioned. Thus, we think that risk premiums are very high already and there is
more of a likelihood that they ease lower rather than soar from current levels.
We continue to like the semiconductor stocks and tech hardware names within the
broader IT sector alongside a positive view towards the Diversified Financials and
Insurance industry groups, yet we would consider taking profits in some areas such
as Capital Goods, Autos & Components and Retailing. Moreover, we are getting
more concerned about the Materials sector which has bounced sharply of late.

A surge in U.S. ethanol production and falling export demand are driving down prices for the corn-based fuel, curbing producer profits and causing some plants to shut.

Ethanol inventories ballooned late last year as producers rushed to take advantage of a government subsidy that expired Dec. 31. Around the same time, exports started to slide and domestic demand weakened for gasoline, with which ethanol is blended. Futures for the biofuel trade 11.6% below year-ago levels, closing at $2.215 a gallon at the Chicago Board of Trade on Friday.

The weak market is expected to cut into the profits of ethanol makers such as Archer Daniels Midland Co. and privately held POET, LLC. Some producers are cutting output, with Green Plains Renewable Energy Inc. announcing last week it would reduce production by 30% at two of its nine plants and consider further cuts.

“There is an overcapacity problem,” Morningstar analyst Min Tang-Varner said. “It will take a couple of large plants shutting down to make a difference.”

The U.S. has ethanol production capacity of 14.8 billion gallons a year, according to the Renewable Fuels Association. In the past week, producers have announced shutdowns totaling a combined 101 million gallons a year.

Ethanol producers say the supply glut is a temporary issue the industry will burn through in the coming months. Still, returning to normal supply levels soon will require a combination of recovering export demand and a seasonal jump in domestic gasoline usage, said Sander Cohen, analyst at energy consultancy ESAI Inc.

“The glut is more likely to stick around than go away,” Cohen said.

Fuel blenders had since 2004 enjoyed a subsidy that awarded them 45 cents for every gallon of ethanol they blended into motor gasoline, driving up demand for the biofuel. That subsidy expired at the end of 2011.

Added production ahead of the subsidy’s end helped build ethanol inventories to an all-time high of 21 million barrels during the first week of February, up 7% from a year ago, according to federal data.

Previous gluts have usually resolved themselves by demand growing each year as federal requirements for ethanol uses continued to kick in. But producers already are blending retail gasoline with 10% ethanol, leaving little room for additional gains under government mandates.

So with domestic hunger for ethanol slowing, overseas demand will be a bigger factor in draining the glut, said Don Roose, president of U.S. Commodities, a Des Moines brokerage that advises ethanol plants.

U.S. ethanol exports reached a record 1.2 billion gallons in 2011, more than triple the 2010 export total of 396 million gallons, according to the Renewable Fuels Association.

The export market may be losing steam, however. Official statistics for January aren’t yet available, but ADM, Green Plains and the Renewable Fuels Association have all in recent weeks said they expect 2012 exports to fall by half as a weakened Brazilian currency gives importers there less buying power. About 40% of all U.S. ethanol exports went to Brazil last year.

In one example of how low margins have fallen, Valero Energy Corp., the largest independent refiner in the U.S. and one of the largest ethanol producers in the U.S. by volume, saw profit margins in January dwindle to a “pretty weak” 5 cents a gallon or less, compared with 56 cents a gallon at the end of December, S. Eugene Edwards, Valero’s chief development officer, said during a call with investors.

The weak margins have some producers shutting capacity rather than losing money. Besides Green Plains Renewable Energy, several small producers have announced cutbacks recently. In addition, ADM said it would close down a small plant in North Dakota.

Still, producers aren’t slowing down. Even with the closure, ADM says it will continue to operate at its full capacity of 1.72 billion gallons.

ADM’s Chief Operating Officer Juan Luciano was subdued about the industry in a recent earnings conference call, saying spot ethanol margins would remain “poor” until supply and demand rebalance, but that the company should see “a little bit of a pickup in the ethanol margin” by the end of the current quarter on March 31.

The Federal Reserve’s sale of short-
term U.S. Treasuries has pushed dealer holdings to the highest
ever as investors pare back purchasing the debt to focus on
longer maturity and higher returning assets.
The CHART shows primary dealers held $65.27
billion of U.S. coupon securities up to three years in maturity
as of Feb. 8, the most ever according to Fed data. The amount
helped to push aggregate dealer holdings of Treasuries to a
record high of $106 billion during the same period.
Under what’s become known as Operation Twist, announced in
September, the Fed is replacing $400 billion of shorter-maturity
Treasuries in its portfolio with longer-term debt to cap
borrowing costs and strengthen the economy. As the central bank
pledged to keep the target rate at near zero through 2014 and as
U.S. economic data shows signs of improvement, investors have
gravitated toward riskier assets, allowing corporate borrowers
to sell debt at record low rates. U.S. debt securities have lost
0.5 percent this year, while corporate bonds have returned 2
percent, according to Bank of America Merrill Lynch indexes.
“The Fed’s commitment to remain highly accommodative until
the end of 2014 has given investors the confidence to move out
the yield curve, perhaps also into risk assets,” said Chris
Ahrens, head interest-rate strategist at UBS AG, in Stamford,
Connecticut, one of the 21 primary dealers that trade with the
central bank. “The Fed conducting its balance-sheet operation
has pushed all this supply into the front end.”

Palm oil imports by China were
443,241 metric tons in January, according to an e-mailed
statement from the customs agency today. That compares with
658,744 tons in December and 416,017 tons a year ago.

China’s Palm Oil Imports
Date Mid Line Events
2012-01-31 443241
2011-12-31 658744
2011-11-30 629222
2011-10-31 457902
2011-09-30 573360
2011-08-31 594862
2011-07-31 511794
2011-06-30 513868
2011-05-31 443202
2011-04-30 453089
2011-03-31 327975
2011-02-28 332495
2011-01-31 416017
2010-12-31 657056
2010-11-30 528624
2010-10-31 359143
2010-09-30 403022
2010-08-31 277655
2010-07-31 459765
2010-06-30 519011
2010-05-31 470673
2010-04-30 531873
2010-03-31 554025
2010-02-28 394260
2010-01-31 541341
2009-12-31 593717
2009-11-30 518168
2009-10-31 496229
2009-09-30 735262
2009-08-31 628637
2009-07-31 673276
2009-06-30 540509
2009-05-31 485252
2009-04-30 404777
2009-03-31 509428
2009-02-28 529666
2009-01-31 326665
2008-12-31 576892
2008-11-30 407353
2008-10-31 300130
2008-09-30 439571
2008-08-31 399194
2008-07-31 491255
2008-06-30 334705
2008-05-31 498478
2008-04-30 586866
2008-03-31 516098
2008-02-29 327574
2008-01-31 404546
2007-12-31 373749
2007-11-30 365253
2007-10-31 485484
2007-09-30 640824
2007-08-31 533897
2007-07-31 336979
2007-06-30 367472
2007-05-31 405855
2007-04-30 435783
2007-03-31 414695
2007-02-28 349814
2007-01-31 387487
2006-12-31 425014
2006-11-30 397073
2006-10-31 443672
2006-09-30 605091
2006-08-31 667130
2006-07-31 569539
2006-06-30 402640
2006-05-31 381313
2006-04-30 349172
2006-03-31 330016
2006-02-28 292623
2006-01-31 276793
2005-12-31 358599
2005-11-30 372559
2005-10-31 369107
2005-09-30 498356
2005-08-31 320552
2005-07-31 439707
2005-06-30 500249
2005-05-31 408374
2005-04-30 300837
2005-03-31 270701
2005-02-28 215017
2005-01-31 266049
2004-12-31 355341
2004-11-30 378828
2004-10-31 365986
2004-09-30 353557
2004-08-31 409140
2004-07-31 262019
2004-06-30 392850
2004-05-31 254400
2004-04-30 383793
2004-03-31 298367
2004-02-29 161913
2004-01-31 241357

Chinas January Agriculture Exports & Imports (Table)