Milk – That’s One Illiquid Liquid

We just so happened to stumble upon the table below courtesy of the Food and Agriculture Organization of the United Nations showing a nice breakdown of the dollar value of the top 20  agriculture “crops” produced around the world in 2012 (the last year of data). Who knew milk is the most valuable “crop” produced in the world, or that the Agriculture bellwethers in the futures space – Wheat and Soybeans – are each less than half the value of the meats (cattle, pig, and chicken).  Or that tomatoes outsell potatoes.

Rank
Commodity
Billions
Production (MT)
1Milk, whole fresh cow $187.28 625,753,801
2Rice, paddy $185.58 719,738,273
3Meat indigenous, cattle $169.48 62,737,255
4Meat indigenous, pig $166.80 108,506,790
5Meat indigenous, chicken $132.09 92,730,419
6Wheat $79.29 670,875,110
7Soybeans $60.69 241,841,416
8Tomatoes $59.11 161,793,834
9Sugar cane $57.86 1,832,541,194
10Eggs, hen, in shell $54.99 66,372,549
11Maize $53.60 872,066,770
12Potatoes $48.77 364,808,768
13Vegetables, fresh nes $46.14 269,852,343
14Grapes $38.34 67,067,129
15Milk, whole fresh buffalo $38.30 97,417,135
16Cotton lint $37.10 25,955,096
17Apples $31.88 76,378,738
18Bananas $28.21 101,992,743
19Cassava $25.69 262,585,741
20Mangoes, mangosteens, guavas $25.25 42,139,837

But we kept coming back to Milk being worth the most “moo-la”, that was utterly interesting (ok, we’re done with the cow puns), and we went searching for some more data, finding an update on Milk production from the USDA:

Milk production in the 23 major States during March totaled 16.7 billion pounds, up 1.1 percent from March 2013. Production per cow in the 23 major States averaged 1,959 pounds for March. The number of milk cows on farms in the 23 major States for March was 8.51 million head, 1,000 head more than February 2014. The average number of milk cows in the United States during the quarter was 9.22 million head.

Milk Production Q1 2014Chart Courtesy: USDA

A single cow produces almost 2,000 pounds of milk by itself… Good to know, but hard to believe until we found out robots were involved via the New York Times.

“Something strange is happening at farms in upstate New York. The cows are milking themselves.

Desperate for reliable labor and buoyed by soaring prices, dairy operations across the state are charging into a brave new world of udder care: robotic milkers, which feed and milk cow after cow without the help of a single farmhand.

Robots allow the cows to set their own hours, lining up for automated milking five or six times a day — turning the predawn and late-afternoon sessions around which dairy farmers long built their lives into a thing of the past.

With transponders around their necks, the cows get individualized service. Lasers scan and map their underbellies, and a computer charts each animal’s “milking speed,” a critical factor in a 24-hour-a-day operation.

The robots also monitor the amount and quality of milk produced, the frequency of visits to the machine, how much each cow has eaten, and even the number of steps each cow has taken per day, which can indicate when she is in heat.”

 

The future is here!

So the milk futures market given milk-bots and $180 Billion in global production each year must be huge, right?  Not even close… as it turns out; the Class III Milk Futures had a Volume of about 2900 across futures and options yesterday, and an Open Interest of about 107,000 contracts. Compare that with Corn at 500,000 contracts yesterday and 2.7 million in open interest, and you can see we’re talking about an illiquid liquid.

So why isn’t there more Milk hedging and the speculators to take the other side?

Well, there is at least one professional speculator in the Milk space, Dairy focused CTA Schindler Capital Management, which just so happens to be up 28% on the year {past performance is not necessarily indicative of future results}. The problem is the CTA isn’t open for new customers because of capacity constraints, based on the fact that the market is just too illiquid.

And why isn’t there more hedging of that $180 Billion in exposure? Well – for one, a big component of the milk price is the price of the feed they give the cows, so a farmer could hedge the feed price instead of the milk price, using Corn or Soybean futures. Further, it doesn’t lend itself to a perfect commodities futures contract. A good futures commodity contract is perfectly transferrable – (a bushel of Corn is a bushel of Corn), cheaply transportable (a train car full of Corn), not easily perishable (Corn can sit in a silo for quite some time), and with a delivery hub close to production.  Milk isn’t cheaply transported and is highly perishable, requiring refrigerated trucks and so forth.  It’s also in nearly every corner of the world – making the delivery of a futures contract a dicey thing. What if it spoils en route?  But the bigger issue is it is produced in almost every corner of the world and that production is highly fragmented (got a cow, you’re in the milk business), leading to less big corporate entities who need to hedge millions or tens of millions of dollars of productions.  There’s also this little PR problem to overcome: “Dairy Farmers of America agrees $46m CME price fixing settlement

So don’t hold your breath waiting for the Milk futures market to explode – we’ll probably see Chicken futures before then.

 

Top 10 Managed Futures Performers of March

While one month’s performance is no way to judge an investment that has 3 to 5 year cycles, a glance at who’s doing well in the different environments month to month can be a useful data point at times. Here’s the top managed futures performers (by return only) for the month gone by:

Note: These programs are not necessarily recommended by Attain. For a list with much more thought behind it – check our semi-annual rankings.

 (Disclaimer: past performance is not necessarily indicative of future results. Programs listed consist of those with at least a 3 year track record tracked by Attain Capital Management for investment by clients via managed accounts and do not represent all available programs in the managed futures universe.  The Max DD represents the worst drawdown of all time for the listed programs). 

Top 10 CTA's of March
March ROR
Max DD
Min. Invst.
White Indian Trading Company -- STAIRS 12.14%-29.02%250,000
Schindler Capital -- Dairy Advantage10.86%-41.48%100,000
Purple Valley Capital -- Diversified Trend 16.90%-49.34%1,000,000
Harmonic Capital -- Macro (QEP)6.62%-21.51%10,000,000
Crescent Bay Capital -- Balanced Volatility6.24%-39.34%25,000
Dorset Futures Corp. -- E-Mini5.93%-33.65%100,000
LJM Partners -- Aggressive (QEP)5.62%-63.83%500,000
Northstar Commodity Invst. -- TBE Capital (QEP)5.47%-44.27%50,000
Melissinos Trading -- Eupatrid Commodity (QEP)5.31%-25.21%250,000
HB Capital Management -- Diversified4.89%-21.22%100,000

Is the Bear Market just Hibernating?

We’re happy to see our friends at J. Lyons Fund Management getting more involved in social media with a blog, twitter handle, and now an emailed newsletter. Here’s some great stats from their latest piece hinting that the bear might not be dead… just hibernating:

NumbersStats Courtesy: J. Lyons Fund Management

 

Weekend Reads

Feel Economy

 

 

 

 

 

 

 

 

 

 

High-frequency trading firm Virtu postpones IPO – (CNBC)

The Flash Boys review nobody wants to read – (Alpine Advisor)

Want Meb Faber’s new book for free? – (Amazon)

Greece Debt Woes are Easing – (The Economist)

If the subject matter wasn’t so… unsettling we wouldn’t stop looking at these charts – How Americans Die – (Bloomberg)

The sticker shock of Cocoa – (Bloomberg)

John Barleycorn bar in Lincoln Park shutting down after 50 years – (Crains Chicago)

12 killed, 3 missing in Mt. Everest avalanche – (LA Times)

 

Why do Investors Love Large Hedge Funds?

It’s the always present question mid-size and start-up funds ask themselves day in and day out. Why do investors keep plowing money into the largest of the large hedge funds when the statistics have shown time and again that those large hedge funds tend to underperform their smaller counterparts. Alternatives research and analysis firm Preqin tackles the question with some hard data in their most recent piece: “What are Investors Looking For?”, showing that the small and mid-size hedge funds outperformed the largest funds by about 1.7% in 2013:

Preqin 2013 AUM performance(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Preqin

One answer to the large versus medium/small debate given by some institutional investors we’ve talked to, highlights the deviation in returns, not the returns themselves,  as the reason to choose a ‘brand name’ Billion Dollar+ hedge fund over a smaller upstart which may provide better performance. The logic is that while they may perform a little worse in terms of return – their worst case scenario is a lot less when choosing Goliath over David.  This is the same reason we reach for the Kraft Macaroni and Cheese versus the generic brand, why all else being equal we go with American Airlines instead of Spirit, and so forth. It’s not all about saving money (or making more of it in case of hedge funds), it’s about having a sense of comfort as well.

But how much of this type of “comfort” are the biggest hedge funds really delivering?  To dive deeper, we took a look at Preqin’s details on how the hedge fund performance in these different size groups was dispersed.

“Fig. 2 shows performance over 2013 according to the 25th percentile, median and 75th percentile values among each of the fund size categories, and the data shows that the top three-quarters of all fund groups achieved positive returns in 2013.”

Performance by Percentile(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Preqin

The invest with a behemoth logic would have us believe the dispersion of the small and medium size funds would be many times that of the large funds in order to make up for the underperformance of the behemoths, and that the so-called worst case scenario of the small and medium size funds would be much worse than the billion dollar big boys. But the stats show quite a different story (at least in 2013…), with the 25th percentile return for the big boys (the worst case) actually less than the 25th percentile average return for the small and medium-sized funds (the startup funds came in a distant fourth).

And what about that comfort level, the dispersion in the large hedge funds returns was indeed less, but not drastically so. Consider medium ($500-999mm) versus large funds ($1b+), where the medium had returns 1.13 times the large, yet a deviation less than that (just 1.06 times as large as the large), and a worst case scenario 1.38 times better. Now, one year doesn’t tell the whole story, and the data for the smallest hedge funds (under $100mm) support the comfort argument with higher deviation and a worse worst case scenario – but don’t throw the proverbial baby out with the bath water by lumping in small and medium-sized hedge funds with the startups. The small and medium-sized provided better returns, with similar comfort in 2013.

Hudge Fund AUM Deviation(Disclaimer: Past performance is not necessarily indicative of future results)

PS – Preqin’s numbers got us thinking… and we’re working on a similar performance/deviation report for just the managed futures portion of the hedge fund space, look for it next week.

 

Managed Futures Linkfest

  • Quarterly Hedge Fund Update Q1 2014, including CTAs — (Preqin)
  • Are Managed Futures ETF’s the best Commodity Play  – (Nasdaq) Our Answer – No!
  • The Case For Managed Futures In A Bull Market – (Seeking Alpha)
  • Manning & Napier acquiring managed futures specialist 2100 Xenon Group – (Pensions & Investments)
  • Human Floor Traders Step Up When CME’s Electronic Trading Fails – (ValueWalk)

Futures Trading on Tax Day

Today is tax day… and if you haven’t filled your federal and state taxes yet, do so now, or have the IRS knocking at your door. April is the time of year you’re forced to review your stock market gains and losses, compiling statements to find your cost basis and take a look at the taxes you owe. But for those of you who traded futures markets, this is one hurdle you don’t have to jump over.

Futures trading actually falls under a different part of the tax code than stock trading, with exchange traded futures and futures options trades being considered ‘Section 1256 Contracts’ come tax time. These 1256 Contracts have some distinct tax treatment, including:

Futures Tax Advantages

Unlike stocks, futures based investments are based on their marked to market value at the end of the year, so any open trade profits or losses in the account are treated as realized profits or losses as of the last day of the year. This is generally good news for investors, as futures gains or losses are treated as 60% long term capital gains and 40% short term capital gains, NO MATTER the holding period. For example, an investor who holds a futures position for just a few minutes, or hours, can book 60% of the profits on that trade as long term gains – even though the trade was anything but long term.

In addition, futures based investments do not require the accounting of individual trades. This is a godsend for any of you who have spent hours searching through old brokerage statements from 4 years prior trying to find the cost basis for a certain stock. There is also no trade by trade accounting in futures, no wash sale rules, and losses can be carried back three years on futures based investments.

Happy Tax Day everyone!

P.S. — Futures gains and losses should be reported on Form 6781 (http://www.irs.gov/pub/irs-pdf/f6781.pdf) for US citizens, which comes over onto Schedule D of Form 1040 on lines 4 and 11. Schedule D: http://www.irs.gov/pub/irs-pdf/f1040sd.pdf