From the June 01, 2010 issue of Futures Magazine • Subscribe!

Stanley Haar on grains: Why markets exist

HaarStanley Haar, Haar Capital Mgmt

After graduating with a degree in economics and international studies from American University, Stanley Haar was a Fulbright Scholar in Brazil in 1971-72, where his research focused on the International Coffee Agreement. The experience in Brazil piqued an interest in commodities, and Haar went on to earn an MBA from Stanford with a concentration in futures markets and international trade.

After graduation, he went to work for Continental Grain in 1977 and has been trading in one form or another ever since. Haar worked on some of the largest commercial trading desks in the United States and in South America and became the commercial manager for Conti’s Brazil operation.

Haar also has worked in senior management positions at several major brokers and as manager of international business development for Franklin Templeton Investments, a global investment money management organization.

Haar says that working in the trading, exporting and processing side of the markets has formed the foundation for his trading experience and has given him an advantage in how to approach markets. He launched his discretionary commodity trading advisor Haar Capital Management, which focuses on agricultural markets, in 2005.

Futures Magazine: Stanley you have worked many years in both the cash and futures side of agricultural commodities. What are the main differences?

Stanley Haar: [There is] a misconception that people in the grain business on the physical side spend most of their time worrying whether prices are going up or down. When [you are] in that business you may have a strong opinion on the price direction that the market is going to take and have a speculative bet as part of your operations, but that is a minor part of the focus. The companies that have grown and survived over the years are ones for which the speculative part is a minor part of the activity. The main focus is on the relationship between futures and cash—the basis—most of the risk positions that you have are basis trades: export premiums, domestic premiums from the farmer, or if you are selling meal and soybean oil, the premiums you are getting from your customer relative to the futures market. [Also, there are] the concerns having to do with logistics: freight costs, transportation, availability of freight, which at times could be a nightmare particularly in places like Brazil or Argentina. If you are operating the processing area, your main focus is on extracting a processing margin which has little to do with the flat prices levels. The main thing you care about is the relationship between the price of the bean and the product. So really, you are running a business and the speculative positions related to the flat price tend to be a minor or insignificant part of the focus.

FM: Do people on the commercial side get themselves in trouble by focusing too much on the speculative side?

Haar: There is a whole graveyard of companies, many of them blew themselves up by focusing too much on those type of risk positions and not on the core of the business which is extracting margin on a regular basis while minimizing risk.

FM: When you began working on the cash side, the majority of production was in the United States. How has the global shift in production changed the market?

Haar: Back in 1985, world soybean production was a little over 100 million metric tons (MMT), of which 57% was in the United States and 25% was in Brazil and Argentina. Now in the current crop year, world production is estimated to be 257 mmt, of which 91 million is in the United States and 132 million is in South America. What that means is that the U.S. share of the world markets has dropped from 57% to 35%. In the case of beans, South America is the dominant force now in production whereas the United States has maintained a dominant position in corn, and wheat is a commodity that is grown in dozens of countries without one dominant producer.

As far as changing the business, grain companies involved in the cash physical side of the business focus their attention on basis trading. The further away geographically from the focal point for price discovery in the futures markets, which is Decatur, Ill. for soybean meal or the delivery points along the Mississippi River for soybeans then you get wider swings in terms of the basis levels. It is one of the reasons the Chicago Board of Trade launched a South American soybean contract, which has never developed much depth or liquidity. It becomes a trickier problem when most of your production is coming out of South America, and yet the futures market is based on a U.S. soybean contract. The other change from having the production migrate to South America is obviously that from an informational point of view there tends to be— even in the age of Internet — a little bit of a lag of information as to what is happening in South America vs. the ability of traders up here to stay on top of what is happening with the U.S. crop. It gives those of us who have some on-the-ground experience in South America a little bit of an edge in terms of analyzing the market.

In the case of soybeans, growing weather in South America is more important than the weather up here. With 35% of world production, and a big share of the export business to China coming from the U.S., I don’t want to minimize the importance of the U.S. but it is certainly not the dominant player [it was] when I broke into the business. Before the U.S. soybean export embargo in 1972-3 there was virtually no soybean production in South America. That embargo created a huge incentive for investment in Brazil and then Argentina was stimulated by Japanese trading houses [that] were victimized by that embargo. Given the importance in the food chain of soybean production they wanted an alternative to the United States given that we violated contract sanctity by slapping an embargo on exports at that time.

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