FM: The growth of commodity funds occurred right as your CTA was launching. How has it affected your trading?
Haar: It has been one factor that has resulted in poorer performance over the last two years vs. the trading prior to that. It has complicated things in term of adjusting to that. I adjusted in 2007 by reducing risk and the number of positions because they were trading in a correlated fashion. It has made things more difficult. It is hard to separate the impact of the index funds from the fact that the real world macro economic environment has become much more unstable over the last few years. There is a fundamental linkage behind the kind of uncertainty we have in the economic environment and how it is reflected in the futures prices. Generally over the years, the focus on anyone trying to analyze what direction futures markets were going to take, particularly on the ag side, were generally focused much more on the supply side. Almost all the attention was on the supply side because it was supply shocks often times created by weather anomalies that would drive the large changes in prices and the demand side was largely taken pretty much as a constant. The consumption side would grow by a couple of percentage points a years based on population growth plus small incremental increases in disposable income that would flow through to the food basket. The kind of economic environment we have been living through for the last couple of years has created a big question mark on the demand side because the depth of the recession we just came through, and the possibility of additional economic turmoil in Southern Europe that is going to have an impact on consumption, particularly the more discretionary food items like coffee and cocoa, so that has become an additional complication in analyzing the markers.
FM: Have you attempted — as other have — to exploit some of the transparency of money flow due to the funds or are you simply trying to avoid getting slapped around by them?
Haar: No. From what I have seen observing the market over the last few years, any type of opportunities to gain from that has pretty much filtered away. The managers of those types of instruments have become more prudent in how they manage those types of flows and rollovers.
FM: Let’s talk a little about the fundamentals of the grain complex. After a crazy year in 2008, they have been somewhat quiet. What main fundamental factors are you looking at?
Haar: We are back to looking at the traditional factors on the supply side, which are largely weather related. The markets have gone back in the last year to a somewhat more typical quiet period, where in the absence of supply shocks the markets tend to trade in a narrow range. It is somewhat of a return to normalcy. The reason for that is, at the moment, there is nothing that is in short supply. The markets are pretty much well supplied with in the case of soybeans and wheat record levels of carryout stock thanks to the fact that we just came through a very benign weather season in South America, which generated record size crops in Brazil and the fact that last year [we] wound up with near record yields in production here as well. At this point we are off to the best start in my 30 plus years being around the ag markets. Farmers are ecstatic. They have had a record pace of early planting, which are generally favorable for yields. Unless there is a change in weather patterns as we get into the more critical growing months of July and August, we could be faced with an additional supply build going into next year, even penciling in robust demand for China.
One of the things we are looking at is some early projections of the return of La Nina later this year into the following year, which if it occurs soon enough could clip some of the production potential off of the U.S. crop but more importantly would have some negative consequences in South America for their next bean crop but that is months away and we don’t know if and when that becomes a factor but it will be something I will be watching and other traders who trade off of the fundamentals will be looking at.
FM: What is your outlook for the 2010 growing season for: Corn, wheat, soybeans?
Haar: Right now given that they are off to a great start and that we have rebuilt some of the stock, particularly with beans, that were in existence a year in a half ago, in the absence of below trend yield, the fundamental trend in the market should be to drift lower. It is difficult to come up with a fundamental scenario where you don’t have an additional build in carryout in soybeans, possibly corn as well, wheat will probably stay the same but it is already near record levels on a worldwide basis. Under that scenario, higher prices will have to come from increased investor demand or heightened concern about inflation or a sharp decline in the dollar. Those could be macro factors that short circuit the fundamental tendencies in the market that point to lower prices.
I am not sure if we are going to see prices [in the $5 area for beans and $2 level for corn] partly because of the permanent layering in of the index funds providing a floor to the prices, and also the fact that you have some improvement on the demand side due to the growth of consumption in China and other developing countries that will probably continue. At these prices, the farmer is going to be making money both in corn and soybeans. Plus people ignore the huge increase in yields over the decades. A lot of that is attributable to breakthroughs on the genetic side. The year to year average gain in productivity has been accelerating in the last few years. Don’t underestimate the ability to gain on the production side without ripping up new land in the Amazon jungle or deforesting parts of the United States. There is a continual improvement in yield due to science and technology.
You asked about the impact of having an increase in production in South America. One thing that does for you is you basically have two production cycles a year rather than one. Therefore if you had a problem in the U.S., or if you had a problem in South America in any given year resulting in a boost to prices that would immediately send a signal to the other hemisphere to ramp up their production so you don’t have to wait a full year to get the production increase. You are basically more on a six-month cycle. On an inflation-adjusted basis it is highly unlikely that you would see the kind of prices we saw in 1972-73 when we came a shade from hitting $13 per bushel, today that would be around $30. For that to happen, you would probably need to have back to back major crop failures in both hemispheres to start thinking about prices getting that high.