T Thheee HHHaacckkeeetttttt MMooonnneeeyyy FFFlllooowww r ... · With regards to rice, should...

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Growing Financial Success

Contents I Hope Fed Chair Janet Yellen Can Print Rice and Wheat Supplies. If Not a Third Modern Day Food Crisis May be Unavoidable Given Current Global Trends In Supply And Demand

Published By Hackett Financial Advisors, Inc.

Shawn Hackett, President 9259 Equus Circle

Boynton Beach, FL 33472 (888) 535-5525

Email: [email protected] www.HackettAdvisors.com

You Can’t Print Wheat and Rice Out of Thin Air- Over the last 7 years despite record global production, global wheat and rice stocks have not grown at all yet global demand continues to soar to new record heights. This has caused wheat/rice stocks to world trade and wheat/rice stocks to world usage to decline back down to the low levels that were seen in 2006/2007 that preceded the food crisis of 2008 and to levels seen in 1972/1973 that preceded the food crisis of 1974. I want to emphasize that this current supply constrained condition has occurred at much higher prices than is currently being offered to world producers today. The crash in wheat and rice prices over the last 6 months is not going to do anything but make this supply/demand mismatch even worse. This is all the more aggravated by what appears to be a building super El Nino come late summer/early fall that has the potential to cause production setbacks at a time when buffer stocks do not exist to offset them. The hard production data since 1950 shows that wheat and rice are the most vulnerable and correlated markets to production problems with regards to El Nino. More specifically, India, Indonesia, Australia, Nigeria and the Philippines have the highest country correlations as drought and floods consistently create production problems. While other Asian countries can see production problems, the evidence is much less compelling. All one has to do is look at last year’s weak El Nino event and how late season flooding in India dramatically compromised wheat production from an expected 100 mmt to the current expectations of 87 mmt to see the impact of a volatile El Nino weather pattern.

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What is even more concerning with regards to rice is that the regions that are most exposed to El Nino effects represent one of the largest exporters of rice in the world (India) and 3 of the largest importers of Rice historically in the world (Indonesia, Nigeria and the Philippines). Indian wheat and rice stocks have fallen 55% over the last 3 years at an accelerated rate. In the case of wheat the USDA predicts they will be a net importer for the first time since 2006/2007 over the next crop cycle. With regards to rice, should India’s crop fall just 5% below last year’s levels, India would likely be forced to completely withdraw from the rice export market similar to what they did in 2007/2008. That would be a loss of 10 mmt of exports. Just to put that number into perspective, that equals 25% of total world rice trade. There is only one other country that has that kind of export power to fill in the gap of an India export withdrawal. That country would be Thailand. The problem is that Thailand has been liquidating their excess rice inventories in the aftermath of their failed rice hoarding scheme. Thailand’s rice stocks have declined by 50% over the last 2 years leaving them with very little ability to overcome a loss of Indian exports. Even if they were willing to completely destock their rice supplies, it would not likely be at current depressed price levels and would require much higher prices to pry this rice form them. Then this begs the question….what happens if Indonesian, the Philippines and Nigerian rice production were to fall 5% from last year’s levels which would be a very conservative estimate based upon historical precedent. That would reduce cumulative production by close to 3 mmt. All these countries have little in the way of any buffer stocks to overcome any crop shortfalls so these lost supplies would then be sought after immediately from increased imports. At such at time of panic not only would these countries want to buy what they need to cover the shortfall but they then would want to buy additional amount to help rebuild buffer stocks at a time when supplies are not available to do so. This is exactly the scenario that took place in 2008 and the set up for it now in 2015 is just as compelling if not more so. Keep in mind that China has become the largest importer in the world of rice to the tune of 5 mmt and they have not been able to increase their rice stocks. All they have been able to do is maintain them. Back during the last rice crisis they were not importing any rice. Both India and China have structural water sustainable resource problems that will necessitate them to reduce rice planted acreage in the years ahead.

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This means that both countries are going to eventually rely on others to maintain their rice inventories. In order for that to happen rice prices must rise in order to incentivize the world to invest in the rice business and grow production. When we look at the last 2 food crises of modern times that occurred between 1972-1974 and between 2006-2008 where wheat and rice were at the epicenter, current levels of supply against demand are very similar. What I find even more amazing is that China is desperately trying to import rice to maintain a stocks to usage ratio of 30% while India the second most populace country in the world and soon to be the most populace in the world is willing to export their ending stocks so that current stocks to usage will only be 11% or slightly over a month’s worth of rice supply. This does not sound like a wise policy and is a recipe for disaster. China is fully aware that it must reduce rice planted acreage over time and is fully aware of the large contaminated and poor quality rice supplies that is has that is not suitable for human consumption and is taking the steps to start the long term importation process. India on the other hand has the same issues as China but instead they are willing to give their valuable rice away at some of the cheapest prices in the world when they are on the verge of becoming a permanent rice importer. One has to wonder what goes on in the minds of the Indians to have such a reckless and irresponsible long term plan for the future. The new leader Modi who is being revered as a transformational leader could soon look like a fool if he does not address the long term sustainability of feeding what will soon be the most populace country in the world. What many have forgotten is that India’s Food Security Bill that passed in 2013 has not yet been fully implemented. It is has taken time for the individual Indian states to build the infrastructure and accounting processes to execute the mandated food security program. The dead line of full adoption by all states is October of 2015 and word out from the Indian government is that the majority of states will have implemented it by June 2015. The full adoption of the Food Security Bill which has at its core to provide cheap wheat and rice to those in India below the poverty line will force greater domestic procurement demand further straining what are already going to be very tight supplies. One can’t know the future with precision but one can see is what the clear longer term outcomes and probabilities should be.

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In the case of rice and wheat a tinder box has been set and it is just a matter of time before the flame engulfs the surrounding forests. Both Rice and wheat have some the strongest smart money buy signals in history. Also, in the last week both markets exceeded important technical price support levels only to reverse back up and close the week back above these levels. This kind of a break down failure reversal higher technical pattern is a classic buy signal for the completion of major lows. We have already seen the first casualty of El Nino with the explosion in prices in the cocoa market as the crop in Ghana has been downgraded dramatically and worries mount over the current dry weather pattern to have a similar impact on the Ivory Coast. Cocoa price have surged some 15% in just the last few weeks as a result. We can expect this kind of weather volatility to be seen in wheat and rice as well as other agricultural markets throughout the growing season as a potential super El Nino rears its ugly head. On the pages that follow I have offered helpful charts for your perusal and I hope you share and can visualize the enormity and gravity of the current precariousness of the supply/demand situation in the 2 most important agricultural commodities in the world. With last week’s technical buy signals in place for wheat and rice, I would begin initiation of long positions with a risk point for exit being a move back down below the recent lows. Call options, straight long futures, bull futures spreads and bull call spreads are all advisable depending on one’s risk parameters. With Love and blessings to all. Shawn Hackett

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Wheat Stocks to usage China and India

Rice and Wheat Stocks to usage China and India

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Wheat stocks to usage in Chindia have reached the same precarious levels that preceded the last 2 epic food crises. Three times is a charm?

Rice and wheat stocks are at similar low levels that preceded the last 2 major food crises




Wheat and Rice Stocks to Usage India

China Wheat Stocks to usage

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Wheat and Rice stocks to usage in India have fallen to only 12% nearing levels typically seen ahead of the last 2 major food crises

China wheat stocks to usage at new 45 year lows. China may need to import wheat as it has been doing in Rice before too long especially if there is a wheat supply crisis.




Thailand Rice Ending Stocks

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With Thailand rice ending stocks dropping in half in just 2 years time, it is highly unlikely they will be drawn down much further given current depressed prices. Reduced exports are likely as a result. Rice Prices will need to rise substantially to get these remaining supplies out of Thailand.




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India’s rapid destocking of wheat and rice is unsustainable. They are already going to be an importer of wheat over the next crop cycle and it may not be too long before rice is next in the importation line.




Rice spot price chart

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A classical break down failure reversal higher buy signal was triggered in the rice market last week. Also a classical hammer buy signal was generated on the candle stick bar. This buy signal will remain unless new lows are made in the weeks ahead.




Wheat spot price chart

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A classical break down failure reversal higher buy signal was triggered in the wheat market last week. Also a classical double hammer buy signal was generated on the candle stick bar. This buy signal will remain unless new lows are made in the weeks ahead.




Indian Wheat and Rice Production For Various Enso’s

(Royal Meteorological Society)

The above chart shows that on average rice production during warm El Nino years was down 6.86% while wheat production was down 4.97%. Neutral and La Nina years have seen production grow in India.

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El Nino




(Royal Meteorological Society)

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In the chart above notice that the majority of all below trend line yield crops for wheat and rice in India have occurred during and El Nino years. Very similar trends are also seen in Nigeria, Indonesia and the Philippines.

The bottom-line with El Nino is that the odds go up dramatically that poor crops will prevail when compared to neutral or La Nina years in India and other parts of Asia. Not a good omen when supplies relative to demand and relative to world trade are back at levels only seen twice before in the 2006/2007 and the 1972/1973 timeframe the preceded the two greatest food crises in modern day times. If one is not interested in buying wheat and rice now given the above aforementioned, then you will never be a buyer if such markets. One last point to make... Poor Asian Monsoon seasons can occur one of three ways: Bad first half and normal second half, normal first half and bad second half, and a generally poor evenly distributed through both halves. In sifting through the data one finds that the any of the outcomes that occur can produce poor crops. In the 2009 El Nino that had devastating consequences for many agricultural markets in reducing production of which sugar was the poster child that year it was a good start and bad finish. Last year we had a bad start and strong finish to the Asian monsoon season and crops the wheat crop in India was devastated. The Asian monsoon season runs from early June to late September. What is most important to focus is not how the monsoon is below average but in what particular geographical areas. All weather models are currently calling for a good start of the monsoon season followed by a bad finish. Time will tell. Many blessings to all and Peace be still Shawn Hackett

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Also remember that you can also open an account with us at Hackett Financial Advisors Inc. We clear all our operations through R.J. O'Brien & Associates whcih is the oldest and largest independent futures brokerage and clearing firm in the United States. A futures commission merchant (FCM), RJO is a full clearing member of: the CME Group (founding member of the Chicago Mercantile Exchange) and all its markets; IntercontinentalExchange (ICE); NYSE Liffe U.S.; and the CBOE Futures Exchange (CFE).

RJO offers the latest in order entry technology coupled with 24-hour execution and clearing on every futures exchange worldwide. Clearing more than 100,000 client accounts, the firm provides a full range of services to the industry’s largest global network of introducing brokers (IBs) and to commercial, institutional, international and individuals clients. These include more than 400 IBs and many of the world's largest financial, industrial and agricultural institutions. We do not engage in proprietary trading; all of our business focuses on our valued clients.

Founded in 1914, RJO is one of the last 'boutique' futures firms in the industry. It is a privately held business majority owned by the O'Brien family of Chicago. The O'Briens have been instrumental in the development of the futures industry and remain committed to the continued growth of the company and our leadership within the industry.

With client assets of approximately $3.6 billion, RJO is a well-diversified, fully integrated FCM. The firm regularly captures top-tier market share in both agricultural and financial futures products at both the CME and CBOT

Our Place in the Industry

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Hackett Financial Advisors Inc. specializes in the agricultural space where there is far less coverage by the commodity analyst community and where some of the greatest opportunities should remain in the years ahead. While everyone on the planet has an opinion on Crude Oil or Gold there are very few who study agriculture in the manner that we do. We would be happy to see if opening an account with us would fit your needs whether as a commercial operator and/or a professional investor/firm. We also put God first in our dealings with you and our approach to the markets. Our heart is in the right place and through is honor and grace great things are possible. We take the view that the more successful you are the more you can give back to those in need. It hardly makes any sense to do it for any other reason. As always thank you for your support and thank you for your healing presence.

If you have any questions about any of the content in this report, please call me at (888) 535-5525 or e-mail me at [email protected] . Thank you for reading and I hope your future investment decisions turn out to be prosperous ones.

With Love and Blessings Shawn Hackett

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