Hot Commodities Edition 16: Mycelium Packaging and Chainsaw Chips

Hot Commodities Edition 16: Mycelium Packaging and Chainsaw Chips

Plant Based Products Council

At the end of January, a consortium of businesses and industry associations  including ADM and Cargill, Tate, and Lyle, as well as Hemp Road Trip, Hemp Industries Association, and Tree Free Hemp — formed the Plant Based Products Council, a business and environmental coalition “working to guide the global economy toward more sustainable and responsible consumer products and packaging through greater use of plant-based materials.”

In this edition, we’re highlighting a few products and companies in the plant-based products space, an industry we foresee becoming major commodity sectors.

PLAs and PHAs

Our oceans and seas are literally choking on plastic. The United Nations estimates that 8 million tons of plastic end up in the oceans every year. Plastics is an ideal market for boosting plant-based, compostable products, from both an environmental and economic standpoint.

Two of the most common bioplastics currently on the market are polylactic acid (PLA) and polyhydroxyalkanoates (PHAs), which are produced from fermented plants’ sugars, starches, or lipids. In the U.S., they are typically made from corn.

With corn prices over the past five years perpetually low, and with U.S. farmers expected to plant record acreage next year, since soybean basis prices are coming in below cost in many parts of the country, any additional new demand sources for corn for industrial uses would be welcome. Cargill knows this quite well, as one of the largest bioplastic producers, NatureWorks, is a joint venture between the company and Thai-based PTT Global Chemical.

But do the benefits of the most common bioplastics live up to the hype? There are a few major issues with these products.

The first issue is that the branding of “compostable and biodegradable” needs clarification — it should be changed from “Compostable” to “Compostable in an industrial composting facility.” This is a key distinguishing factor. Industrial composting facilities are huge piles of compostable materials. Industrial composting facilities contain a large amount of decomposing matter, which produces heat in excess of 140° F, the threshold to break down these materials, and contains the microbes required to fully decompose the broken-down material. In absence of these conditions -- for example, in a landfill or in the ocean -- these products can remain around for similar time lengths as petroleum-based plastics. Arecent study, which put bioplastics in artificial seawater conditions for a year, found very little degradation for PLA.

The second issue is that these bioplastics are not compatible with plastic recycling, and must be removed from the recycling stream before traditional plastics can be processed. But since China banned all imported recyclable plastics last year, the plastic recycling industry in the U.S. has atrophied, and as little as 20% of plastic end users think that what they are recycling actually makes it to a recycling facility, with the rest either sitting in storage waiting for a destination or ending up in a landfill [PDF].

Both of these main challenges can be overcome primarily by education. New industrial composting facilities continue to pop up around the country, and these facilities should work with bioplastic producers on education, in order to ensure that bioplastics are diverted from landfill and recycling streams to the composting streams. There’s already been significant development in changing the verbage from “compostable” to “compostable in an industrial facility,” with the aim of getting all bioplastics to the correct facilities so that they actually do decompose. (Data on composting facilities if time)

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SunChips - A Bag Ahead of Its Time

In 2010, Pepsi Co launched a compostable, PLA-based bag for its SunChips brand of chips. The company launched an extensive marketing campaign around the product launch, providing education on how to compost and the benefits of doing so. But they faced one challenge they didn’t expect.

The bags were entirely too noisy. People freaked out about the crinkling sound, prompting the creation of YouTube videos including Sun Chip Bag-Great Toy For Babies! andSunChips New Bag vs. Chainsaw, which is louder?? The noise the bag created became a national meme, prompting the publication of thousands of web pages decrying the riotous cacophony ruining the peace and quiet of the snack aisle or office kitchen.

Pepsi pulled the product line from shelves and created a newer, less noisy bag, but that was soon pulled as well. Seemingly, the non-noisy bag was too expensive to produce. This is an area the PBPC should re-investigate.

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Edible Six-Pack Rings

A Florida brewery called Saltwater Brewery found a way to use barley and wheat ribbons, byproducts from the brewing process, to create six-pack ring holders that are not only biodegradable, but edible for sea species, including turtles, fish, and marine birds — and people, if that’s your thing.

Head of Brand Peter Agardy told CraftBeer.com, “We hope to influence the big guys and hopefully inspire them to get on board.” And getting the big guys on board has finally started to work. Last November, Corona announced they will pilot a plastic-free six-pack holder in select markets.

Byproducts and co-products produced during brewing and distilling, including ethanol production for use in gasoline blending, are often known as distiller’s dried grains and solubles (DDGS) and typically end up in feed ingredient blending or go directly to ranchers. Finding a way to use these byproducts on site while reducing plastic inputs is a promising solution.

With these products, now you only get plastics in your beer, not outside!

Mycelium-Based Packaging

One company is using an entirely different kingdom to create a bio-packaging product.

While most products in the space use bacterial fermentation to create polymers or process plant fibers into processed building materials, Ecovative Design is using mycelium, the root structure of fungi, to create packaging and other building and design materials.

The company processes and sterilizes agricultural waste, then inoculates the substrate with a fungi that binds the materials together. The process produces an entirely compostable material that not only breaks down, but is a healthy addition to soils.

Utilizing agricultural waste to create a biodegradable material is the heart of what the PBPC should be about.

Hemp as Promising Solution

As we’ve mentioned in previous editions of Hot Commodities, hemp has been lauded as a promising input for the sustainable packaging markets, with a handful of viable products and companies in commercial operation.

As the industrial hemp market continues to develop, we’ll be highlighting technologies and companies bringing these products to market.

Blockchain

Once hailed as unhackable, blockchains are now getting hacked

When many blockchain experts talk about the technology being unhackable, they typically mean from a 51% attack, where one entity controls 51% of the blockchain network, and can insert and confirm an altered history of the blockchain. The theory is that with a massively scaled, public network, the resources required to control 51% of any network would not be feasible. But just that happened on a number of the cryptocurrency networks, most notably Ethereum, one of the largest.

Besides the 51% attack, all blockchains are software, and any developer will tell you any piece of code is inherently risky, and bugs have been found on just about every platform.

And finally, even if your code is perfect, there’s a chance that someone holding your crypto CEO might just up and “die.”

Hot Commodities Edition 15: Corntroversy and Hemp Prices

Hot Commodites Edition 15: Corntroversy and Hemp Prices

Hemp Market Data

Last week, we officially launched our Hemp Pricing and Market Data product. We are publishing monthly spot biomass assessments for Colorado, Oregon, and Kentucky, and expect to expand quickly to crude and distillate as well as to other regions. As the market evolves, we plan on evolving with it. Monthly assessments will be published every fourth Thursday of the month.

Corntroversy at the Super Bowl

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I know you’ve probably heard about the Bud Light commercial. Everyone from ABC to TMZ reported on the uproar from other beverage producers, corn farmers, politicians, grandmas on their couches. But we’re going to give our opinion, nonetheless.

Anyone who has ever brewed a single beer knows that corn sugars are invaluable tools in the brewer’s toolkit. For the homebrewer, corn sugars are crucial. Craft breweries utilize corn sugars — whether flaked or as syrup — in a large slate of their beers. Corn sugar is a complete fermentable, meaning that it ferments entirely, and corn sugars specifically ferment without altering the mouthfeel like barley malt does, giving a lighter air to the beer.

Russian River, whose double IPA, Pliny the Elder, won the Homebrewer’s Association’s best beer in the U.S. for seven years in a row and has an obsessive cult following, provided the recipe to the American Homebrew Association. A six-gallon batch calls for ¾ pound of corn sugar. Every other professional brewer we talk with says corn sugar has its place in the brewing industry.

Are there problems with sugar consumption globally? No doubt. Is corn syrup part of that problem? Sure. Does making a ridiculous Super Bowl ad attacking an entire industry using one scary buzzword fix the problem? Nope.

But I think the real question should be: why is anyone out there arguing about and drinking Bud, Coors, Miller, or any of the “domestic” beers? How about we highlight the small-business, craft breweries down the street run by local small-business owners? Cerebral Brewing and Odd13 are two of our favorites here in Colorado.

</rant>

Venezuela's Heavy Crude

Right in line with the Bud Light commercial attacking corn syrup, the CBO said in last week’s long-term budget outlook that corn and soybean farmers face tough years ahead.

After the trade war all but shut down exports of soybeans to China, USDA expects ending stocks to surpass previous records (the next WASDE comes out on February 8th; the January release was canceled due to the shutdown). And with swine flu causing Chinese ranchers to cull their herds, significantly decreasing feed demand, and the heart of Brazil’s harvest a month away, the chance of a significant price rally in soybeans wanes.

And further bad news: as farmers sell their soybeans for lower prices and expectations become more negative, farmers will plant fewer soybeans and switch to corn for the 2019/2020 crop year, with near record acreage expected for corn.

Hemp Disrupting Microplastics?

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The oceans are drowning in plastic. Anew study out of the UK found microplastics in every species of marine mammal studied. Microplastics were categorized by a specific size, and the report found that nylon fibers used heavily in clothing and fishing lines made up over 60% of those microplastics.

The initial and primary use of hemp will be for CBD production, as the market is nascent and booming. But the plant’s fiber production results in a huge variety of uses. While most minds initially go to a smelly hippie wearing a hemp necklace, processing of one of the most durable natural fibers on the planet can lead to incredible applications, from moisture-wicking performance clothing to composites stronger than steelHenry Ford recognized the benefits all the way back in 1941.

We’re hopeful that using hemp fibers to replace nylon and other synthetic, plastic-based fibers will ease the pressure on ocean flora and fauna.

U.S Crude Markets

The crude markets have edged higher over the past week on news of the Trump administration placing sanctions on Venezuela's crude exports, essentially barring any U.S. refiners from purchasing crude oil from Venezuela. The U.S. is one of the few cash-for-crude customers, as much of the crude that is exported to non-U.S. countries is in exchange for debt payments, primarily to China. While these debt payments are critical for avoiding default on sovereign debt (and, at this point, the implosion of the economy), cash flow for a struggling PDVSA (the Venezuelan state-owned oil company) is also critical, and this seems to be a major blow and and potentially the straw to break the camel's back for the Maduro administration. The administration is currently attempting to take assets, including gold and foreign reserves, out of the country.

While the removal of this oil could help to elevate U.S. shale differentials, as we’ve mentioned in previous editions, the lighter U.S. shale crude cannot completely replace imported heavy crude. And Venezuela was a substantial buyer of light crude as a diluent to make their heavy blends flow.

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Last week, while talking with crude traders, we heard that the Permian market has tightened significantly as pipeline capacity has opened, with operations on the Sunrise pipeline hitting full steams, causing companies searching for available barrels to cover sales in the gulf. This has caused a rally in Midland differentials, as fresh production continues to be slow to come online and unsold barrels are increasingly harder to find on the spot market. As differentials improve, this should provide a spark, at least temporarily, for the Permian sand market; however, the general consensus remains for the real uptick in activity to occur in late Q2 or early Q3 2019.

This lighter slate is causing some interesting capex investments in the gulf.

U.S. Refining Capacity

Last week, ExxonMobil announced a new crude unit as part of the Beaumont Refinery Expansion. This new unit is built to handle the lighter crude coming from the U.S. shale plays. While this new refinery will help ease the price pressure on lower 48 crude differentials, it will potentially continue the trend of increased gasoline stocks, keeping gasoline prices lower while diesel and other middle distillate prices remain relatively high.

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Blockchain

A new JP Morgan report poured cold water on blockchain’s ability to revolutionize international payment systems. The report says, "Blockchain is unlikely to re-invent the global payments system, but instead can provide marginal improvements to various parts of the process."

As we’ve mentioned in previous editions, the idea that a type of technology could revolutionize an entire industry or supply chain is almost certain to fail. Technology like blockchain should be used to help specific sections that are the largest points of pain for those involved — for the commodities industry, a top target would be document management. Overnight-shipping a bill of lading halfway across the world as a requisite for payment release is an antiquated system ripe for disruption.

Unfortunately, revolutionizing the “bill of lading and other document management operations handled by back office staff” isn’t as sexy as revolutionizing an entire industry.

Blockchainia!

Here’s this week’s roundup of “(insert company) is using blockchain to revolutionize the (insert industry)” but likely won’t make it out of concept phase:

Hamill farm uses blockchain to trace beer grain ingredients from field to can

Ugandan firm uses blockchain to trace coffee from farms to stores

Major Mining Company BHP, Japanese Shipper NYK Deliver Biofuel Traced via Blockchain

Hot Commodities Edition 14: Venezuela's Heavy

Hot Commodity Edition 14: Venezuela Heavy

Don’t you hate it when you come back from the holidays and you’ve lost $80 million? A BNP trader reportedly left an S&P futures position open over the holidays and, as of lastweek, had not reported back to his desk.

Anyways...

Today we’re giving a quick update on a few of our markets and exploring a few others we find interesting.

Hemp Market Data

We’ve got some exciting things happening in the hemp market. Click below to get the updates.

Frac Sand

In the frac sand market, we’ve expanded our pricing and data offering to include three additional indices for FOB Wisconsin, the origin of northern white sand. With the continual opening of sand mines located much closer to the major oil basins and the standardization of spot markets, optionality related to quality and location is becoming more important.

Frac sand costs make up around 25% of the total cost of a well, and proppant data is a forward indicator of futures oil and gas production.

Click below for more information on PanXchange frac sand pricing.

Venezuela’s Heavy Crude

The pressure on the Maduro government of Venezuela continues to build. U.S. State Department officials and diplomats have called Maduro’s government illegitimate, with an official statement from the president recognizing the President of the Venezuelan National Assembly, Juan Guaido, as the Interim President. Administration officials also signaled that further sanctions could be imposed by as early as this week. The UNHCR estimates that 3 million Venezuelan nationals have fled the country thus far. Many of those citizens abroad are now protesting the government and supporting the opposition, the National Assembly.

But one group has been hesitant about increasing pressure and ushering in the repercussions of a collapse of the state: U.S. Gulf Coast refineries.

With the light, tight shale revolution in the U.S., the average API gravity of crude processed in the U.S. increased substantially (see chart). The problem is that U.S. refiners, particularly in the GC, are not designed to process this lighter crude slate. And Venezuela is a main supplier of the heavy crude oil needed to lower that average API to the level refineries need.

Increased pressure from outside forces and the potential collapse of the Maduro government could shutter all Venezuelan exporters of heavy crude blends. But with exports already at multi-year lows and trending lower, while equipment and facilities in the oilfields continue their further spin into disrepair, a collapse and the installment of a new government more welcome to outside, private institutions could be more positive for long-term output.

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Africa

The South Africa maize harvest has repercussions for markets across the entire continent. Most of South Africa’s neighboring countries are maize-deficient countries, causing them to import the difference in production and local consumption. And with maize harvest recently being particularly volatile — 2016 saw over 100% increase year over year — markets across the region have experienced similar volatility.

So what are the projections this year? The latest USDA FAS projections from December showed, “South Africa’s 2018/19 corn production is forecast at 12.0 million metric tons (mmt), down 1 million tons from last month (8 percent) and down 1.5 mmt (11 percent) from last year.”

The rains have been slow since the December update, so it’s likely that projections will decrease again in the next release. Should they drop below 10mmt, it’s likely that South Africa will be bidding for corn on the global market.

If that happens, maize which typically lands in the major East African demand hubs of Nairobi, Kampala, and Dar es Salaam will make their way south. Thus far, prices have remained relatively low in Nairobi, with this week’s pricing for Maize at $241/MT. Should the rains in South Africa continue at the slow pace, pricing across all of eastern and southern Africa should strengthen.

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Sustainable Palm Oil

Palm oil is not a topic you want to bring up at a party. People get heated about the deforestation of some of the most diverse ecosystems on earth. So the Roundtable on Sustainable Palm Oil came up with standards for sustainable palm oil and production boomed. The problem is that not as many buyers want it.

Production of sustainable palm oil reached 13.6 million metric tons this year, around 20% of the global output, but much of that is being sold to regular streams as the costs for sustainable certified palm are too high for many buyers.

Food companies in the West, including Mondelez International, Inc., and Nestle SA, are the leaders in embracing sustainable palm oil. But demand in China, India, Malaysia, and Indonesia remains low to nonexistent.

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Blockchain

In previous editions of Hot Commodities, we’ve spoken quite extensively about problems related to the battery-metal supply chain, particularly with cobalt, as around 60% of the global supply comes from the DRC. Ford, IBM, LG Chem, and Huayou Cobalt, overseen by RCS Global, announced a blockchain pilot project to try to track cobalt supplies from the mine all the way through to the electric vehicle on the road.

The project aims to tag every bag of ore with a hash on the blockchain, and track that hash all the way from the smelter, to the battery producer, to the individual vehicle. But with so many hands touching the product as it travels all the way across the heart of Africa to China, this is a tough task for any software solution.

Blockchainia!

Some great comments on the lofty proclamations of blockchain startups when they hit the ground and face the reality of building a business.

Hot Commodities Edition 13: The Year of the Hemp

Hot Commodities Edition 13: The Year of the Hemp

Happy New Year. We’re naming 2019 “the year of hemp.”

It’s a market we’re excited about, so today we’re giving a bit of a high-level primer on the hemp supply chain. Stay tuned for additional news

Farm Bill

President Trump signed the new farm bill into law on December 20th, 2018, legalizing industrial hemp production nationwide. So, does this mean that farmers can go out and plant however much hemp they want? There’s a bit more to it than that.

State governments must converse with governors and chief law enforcement officers to devise a plan for state licensing and regulation and submit that to the secretary of the USDA. Farmers in states that don’t develop their own licensing procedures fall under federal jurisdiction and must register with the USDA and comply with federal rules.

According to the farm bill, all industrial hemp plants must also have a THC quantity of no more than 0.3% on a dry weight basis. The bill also details the punishment for going over that amount and gives guidelines on how farmers can become compliant.

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Use and Production

While there are many advertised uses for hemp, including fiber use in textiles, seeds in food, and oils in manufacturing, the largest initial demand will be for Cannabidiol (CBD), or production for medicinal use.

So, is hemp production going to boom, with farmers switching from dryland crops across the board?

It’s a tricky question, but dryland grain and oilseed farmers would have to make some expensive investment to convert land to hemp production, including costs from new planting, harvesting, and curing equipment, as well as new irrigation techniques where needed. With farm debt nearing all-time inflation-adjusted highs, and the farm debt-asset ratio increasing from 13.1% in 2017 to 13.5% 2018 (pdf), farmers are likely wary of taking on additional debt to finance new equipment. But there are a few geographical areas where hemp production could see booms.

The first area, and the region with the main supporters of this addition to the farm bill, is traditional tobacco country. According to the Agricultural Marketing Research Center, “Tobacco production has decreased from more than 2 billion pounds in the 1970s to 629 million pounds in 2016, down 16 percent from 2010.”

Tobacco is one of the most labor-intensive markets, with seeds started in greenhouses or cold frames, then seedlings manually planted in rows. Upon harvesting, the leaves are bundled and cured in huge barns. The planting, sowing, and curing of tobacco is amazingly similar to hemp production. Mitch McConnell of Kentucky, the second-largest tobacco producer among states, was arguably the largest reason why the hemp provision was included in the farm bill to begin with.

The other areas where we could see an additional boom are states that previously legalized marijuana and already have a cannabis industry. Pueblo, Colorado was one of the first communities to actively push for hemp production and the first in Colorado to adopt regulations for industrial hemp. Pueblo County already has a strong growing and processing presence.

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Markets

Geographically, the hemp market hubs are already naturally gravitating towards the areas mentioned above that are ripe for an increase in hemp production, notably Colorado, Oregon, North Carolina, Kentucky, Montana, and Tennessee.

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Opacity

New markets always face the problem of opacity, with price discovery systems not yet developed and disconnected markets yet to eliminate arbitrage opportunities. But hemp faces extra headwinds because, with hemp being previously illegal and having a close connection to marijuana, many of the players operate in a less than legal space.

Also, since hemp was illegal on a national level prior to the 2018 farm bill, banks and payment processors could not get involved, pushing the market into a cash-based business. These types of businesses always attract crime and "creative finance specialists." When you are concerned that a new buyer could show up brandishing an AR15, one quickly gets in the habit of not discussing their business.

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Blockchain

There’s been an endless barrage of dank-kush-canna-coin launches since the early days of crypto, but in reality hemp could be the perfect market for a blockchain traceability product.

While the regulatory framework from the USDA is not complete, there will likely be traceability requirements for genetics and CBD or THC concentration which will reach back all the way to the individual grower.

In addition, China is the top global hemp producer, but all levels of CBD distillate are locally illegal, so all production is exported. The hemp plant acts as a sponge and absorbs everything in its environment, and toxins can be amplified by the curing process. Areas like China with lax environmental regulations have been known to export products with low quality control or even adulteration, including some with high heavy-metal and pesticide content, which are imported as car wax or similar products, then repackaged, relabeled, and sold as U.S.- or Europe-origin CBD.

The above bodes incredibly well for a well-designed blockchain system, and the

hemp market has a unique ability to get the traceability right. We will be enthusiastically following new entrants, so if you are in the supply chain for the hemp market, please reach out to the team, as we’d love to hear what you’re working on.

Hot Commodities Edition 12: Happy Holidays!

Hot Commodities Edition 12: Happy Holidays

We wish all PanXchange friends a happy, merry, or joyous non-denominational December-to-January multicultural holiday celebration!

Today we’ll be exploring the commodity side of a few holidays this time of year.

Festivus Pole

We’re kicking this edition off with our favorite wintertime holiday. And what would Festivus be without an unadorned aluminum pole?

After a huge spike in spot aluminum prices from under $2,000 per ton to around $2,500 following sanctions on Rusal and U.S. tariffs on aluminum, prices ended the year a bit lower. Nevertheless, these ending prices still sit near the highs of the previous four years. For any newcomers unable to afford their first pole, we welcome you at our house. Come prepared to wrestle.

The Treasury Department today announced that sanctions will be removed from Rusal, so 2019 should be a great year for converts.

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What Aren't Millennials Killing?!?!

Is there anything millennials aren’t killing? People are constantly complaining about all the things those young whippersnappers are heartlessly killing — everything from Applebee’sto canned tuna and napkins, and now even handshakes. Well, good news; there’s one thing you can cross off that list: Christmas trees!

Square and the National Christmas Tree Association released a report analyzing data from thousands of Christmas tree farmers, which found that real Christmas trees are top-of-mind for millennials:

“Demand previously dipped when baby boomers turned to fake trees as their kids moved out of the house. Christmas trees are now part of millennials’ hyper-awareness and affinity for all-natural and locally sourced food, beauty products, home goods, and more.”

The next few years could be a great time to be a Christmas tree and avocado toast farmer. Does avocado toast grow on a tree or in the ground?

Christmas Tree Supply

Hopefully you got your Christmas tree early — trees are in short supply this year.

Christmas trees take six to ten years to grow from a seed to harvest, and a decade ago we were right in the middle of the financial crisis, during which demand for Christmas trees was low. Farmers were left with a large amount of unsold supply, and decided not to take the risk of planting new seedlings. That, combined with a few record hot and dry summers in Oregon and Washington, left us with a supply shortage today.

According to the Square and NCTA report, Christmas tree prices saw a 17% increase from 2015 to 2017, with the average price rising from $64 to $73. With the short supply this year, prices likely continued to increase.

Prices will likely follow historical trends, peaking just after Thanksgiving and gradually dropping all the way to the 24th. But all you savvy shoppers looking to buy your Christmas at the lowest price point on Christmas Eve might be out of luck this year.

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Hanukkah Oil

For those who celebrated Hanukkah in the traditional manner this year, it could be an expensive year, burning all that olive oil.

California olive oil producers had a terrible harvest this year, after warm weather in major growing areas in January and February caused olive trees to bloom, then cold weather in March froze those blooms. Many olive trees didn’t produce a single olive.

This year has been even worse, with extreme drought damaging and stunting tree growth. A few winter storms have eased the drought as of late, but most of the state is still under drought conditions. While California only represents 5% of total U.S. olive oil consumption, the market share is growing. And even a dip in that 5% could put a major dent in the pockets of those trying to burn for all eight nights.

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Farm Bill and Rastafarian Christmas

Rastafari have a reason to celebrate ahead of Ethiopian Christmas on January 7th. The newly passed farm bill will make hemp farming legal nationwide.

As CBD will be legal nationwide, hemp farming is certainly the talk of the town, but will we see a boom of dryland crop farmers flooding into the newly legal hemp market?

Hemp grows well in just about every part of the U.S., aside from extreme deserts and mountains. As of now, its sowing, harvest, and curing are significantly different from those of the major grains and oilseed crops like corn, soy, and wheat. The plants are started in greenhouses and sown from seedlings, and upon harvest are cured in large warehouses to concentrate the cannabidiols in the leaves and flowers. The process is quite similar to tobacco farming, with similar planting equipment and drying and curing techniques. And with tobacco use continually declining, it should be a natural transition.

So, will we see millions of acres in the U.S. converted to hemp farming? Not likely, but the acreage that is converted should ease price pressure on other crops, with a relatively new market of cannabidiols not cannibalizing demand from grains and oilseeds.

While hemp isn’t necessarily the “Tree of Life” cannabis plant of tradition, this new farm bill will likely pave the way for continued liberalization throughout the states.

We’ll be following the hemp market very closely in the new year, as it’s bound to be a dynamic and exciting market with lots of smart minds coming together. Stay tuned for more news.

Blockchainia!

Energy usage for blockchain and particularly cryptocurrency has been a hot topic this year with news outlets competing to figure out the best country to compare electricity pricing to. Now Crypto site Chepicap is asking the important questions this year:

Support the blockchain technology revolution or buy more Christmas lights?

Blockchain or Santa — the choice is yours.


Happy Holidays to all our friends, and that’s all for the year!

-Editor in Chief Josh Yanus

If you have any newsworthy content you’d like to share or super awesome ICOs you want to pump, please send to jyanus@panxchange.com.

Hot Commodities Edition 11: Supply Chain Troubles

Hot Commodities: Supply Chain Troubles

I was in the grocery store over the past few weeks and noticed something: there’s no romaine lettuce anywhere. None. Anywhere.

Every single leaf of romaine in the nation was thrown away. The recall disrupted trucking markets, and thousands of tons of romaine were dumped at landfills.

While food safety is certainly top priority, in the supposed age of big data it’s amazing that the U.S. supply chain lacks the systems to quickly identify exactly where the breakout originated.

Today we’re exploring a few other troubled commodity supply chains.

BMW and Cobalt: Avoiding "Blood Batteries"

As global EV sales explode, BMW is expanding their fleet of electric vehicles offered. Electric vehicles rely on lithium ion batteries, which utilize lithium as the anode and an assortment of metals as the cathode, with cobalt being a significant part in all cathode arrangements. While vehicle batteries use a smaller proportion of cobalt than consumer electronic devices, the sheer size of vehicle batteries means that over half of the global cobalt produced is used in EV batteries. And over half of the global cobalt production comes from the conflict-torn Democratic Republic of Congo.

After an uproar from customers about the child labor and dismal living conditions of the “artisanal” mines, BMW launched a strategy to take the unethically mined cobalt out of their supply chain. The company would start by releasing the names of the smelters and origins of the raw materials. They said they will publish where their batteries’ raw materials originate, and not just for batteries supplied to BMW but all indirect suppliers too. But how exactly they will know with such a messy, opaque supply chain is yet to be seen.

Last week, BMW Group, BASF SE, Samsung SDI, and Samsung Electronics launched a project to improve mine safety in the DRC. The project aims to improve working conditions, but details were limited.

One major improvement would be a significant increase in the transparency of the entire supply chain, from the mine all the way to the car. Up to now, all announcements were limited to BMW saying they were investigating suppliers and looking into conditions. Releasing actual data on where raw materials were sourced would go a long way with consumers in reassuring them that their new i8 isn’t going 0-60 in four seconds flat on a blood battery.

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Cocoa Value Chain

A scathing report published by the Brazilian government reported that the cocoa supply chain is rife with human rights abuses, where indentured servitude, slavery, and child labor are prevalent.

Cocoa production is almost exclusively located in tropical countries, with the majority in Africa. The African supply chain has long been known to have similar human rights issues, but it appears Brazil is taking the lead on addressing these issues, in publicizing this report if nothing else.

The chocolate industry has long researched sustainability and social issues with cocoa production. But with the geographic disparity of cocoa production the problems have thus far been insurmountable.

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Cargill Poultry Acquisition

It appears that Cargill’s strategy for supply chain efficiency is to own the whole thing, at least in the poultry space. The company continued its global campaign with the acquisition of CAMPOLLO in Colombia. The acquisition of the team of 2,500 brings Cargill’s total presence in Colombia to 7,500, and follows the September acquisition of Konspol, one of Poland’s major value-add processors in the poultry space.

While Cargill has highlighted transparency in recent years, owning that much of a supply chain brings into question the veracity of data released. Though the poultry space doesn’t have the same environmental and social issues as previously-mentioned commodities, with the ever-increasing demand for protein and white meat taking the lead, issues are likely to arise.

Blockchain Solutions

Blockchain has long been lauded as a potential solution for creating supply chain transparency. It seems like every news journal is pumping out estimates of how many billions blockchain in commodities will be worth.

As we noted in our previous edition of Hot Commodities, the Cargill project using blockchain to track turkeys back to the farm where they were raised is certainly an interesting case study. But as firms like Cargill encompass entire supply chains, is blockchain really an effective solution?

The main value-add for blockchain is the trustless, decentralized scaling to a large amount of users. A private blockchain exclusive to one user is simply a needlessly complicated, slow database.

Another model is the private, permissioned blockchain that would create a ledger of shared, overlapping infrastructure between the large players. There would be permissioned blockchain, fully encrypted, with only counterparties privy to the info that would be unlocked. But that just makes the blockchain a shared database, with which there is plenty of viable, proven competition.

Blockchainia!

A new report based on the monitoring, evaluation, research, and learning (MERL) process — which is sure to be not controversial in any way and widely accepted with open arms — found that every one of the 43 use cases studied were significantly under-delivered. Furthermore, they “found no documentation or evidence of the results blockchain was purported to have achieved in these claims.”

Their final findings?

“Blockchain firms supporting development pilots are not practicing what they preach — improving transparency — by sharing data and lessons learned about what is working, what isn’t working, and why. There are many generic decision trees and sales pitches available to convince development practitioners of the value blockchain will add to their work. But, there is a lack of detailed data about what happens when development interventions use blockchain technology.”

Could this be the Trough of Disillusionment in the Gartner Hype Cycle, with the Slope of Enlightenment on the way bringing a wave of successful and groundbreaking use cases? Let’s see what 2019 brings.

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Hot Commodities Edition 10: Happy Thanksgiving!

Hot Commodities: Thanksgiving Edition

Happy Thanksgiving from the PanXchange family to yours!

We sincerely hope that violence related to the bitcoin investments recommended at last Thanksgiving will happen only once dinner is finished. Manners, please.

Today, we’re going to give a quick rundown of some of the food on your Thanksgiving dinner plate for all of you still in the office just trying to make it to the end of the day. But first, scientists are finally solving the question on everyone’s mind this time of year:

Can you cook a turkey with its own manure?

The world produces between 625 and 938 million metric tons of poultry manure every year. Poultry manure is very rich in nitrogen — often too rich to put directly on crops undiluted. At large-scale facilities, getting rid of the manure can be an expensive process, and often the manure ends up in landfills.

Scientists at Ben-Gurion University in Israel are working on a project to turn poultry manure into a usable solid fuel. There are already facilities to process manure into biogas, but storage and transportation of biogas is a much more in-depth and expensive investment. Produced in an autoclave that uses heat and high pressure to mimic the natural process that creates coal, the solid fuel can be stored, transported, and burned on its own or in coal-fired boilers.

The team of scientists are so excited with their results that they aim to cook a turkey in hydrochar made from turkey manure. We at PanXchange will stick to the deep fryer, and hope to not be one of the five deaths, 60 injuries, or 600 homes burned this time of year.

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Turkey Prices

So, what are turkey prices like going into Thanksgiving? With very high ending stocks of feed inputs due to bumper harvest and trade wars limiting exports, along with poultry ranchers simply raising more turkeys this year, turkey prices have trended down. The USDA reports that both fresh and frozen whole hen prices have tracked below both 2017 and the 3-year average levels. If you’re looking for some cheap end-of-year birds, this year should follow previous years with a drop through December.

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TurkeyChain

Turkey buyers from Cargill’s brand Honeysuckle White will now be able to use a blockchain based system to find exactly what farm their turkey came from as well as pictures of the turkey and additional details provided by the farmer. You’ll now be able to have a name, photo, and Myers Briggs personality type for your turkey while you stuff its cavity with a mixture of bread, spices and seasoning. Yum!

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Cranberries

Cranberry farmers will destroy almost a quarter of their crop this year, with approval from the USDA. In what would be deemed illegal in almost any other industry, farmers are exempt from the practice of “volume regulation” under a 100-year-old law. With storage still full from a 2017 crop, we’re not sure if demand can alleviate any of the pressure. Even with the destroyed crop, cranberry prices should be capped. Good news for those who actually enjoy cranberry sauce. They have to exist somewhere, right?

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Potatoes

What would Thanksgiving dinner be without the perfect finger food: mashed potatoes? While some areas, particularly Michigan, Wisconsin, and North Dakota, had heavy rains and early freezes damaging some potato crops, Colorado to the west had strong harvests that should keep prices flat year-over-year.

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Pumpkin Pie

According to Costco Connection, the chain sold 5.3 million pumpkin pies in 2015, the last time they disclosed sales. Those pies took 3.4 million pumpkins to make. With Costco’s 2018 total sales over 20% higher than 2015, extrapolated out to pies, that would be a massive 4.08 million pounds of pumpkins.

Costco begins forecasting holiday sales in March and April and contract with farmers for the holiday season, with Illinois leading the nation with almost half of the total US production.

With DAT quoted Van rates down on the month but up on the year, higher pumpkin demand combined with higher freight rates should mean higher pie prices.

Pumpkin futures, anyone?

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Blockchainia!

When you think of countries with decentralized autonomy and a culture open to blooming technologies, I bet you immediately think of North Korea. Well good news!Pyongyang is hosting an international blockchain and cryptocurrency summit. Clear your schedule for April 2019. (Journalists not allowed to attend.)

 
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Hot Commodities Edition 9: Commodity Technology Special

AgTech is a hot industry.

Companies in the space raised $10.1 billion in 2017, a 29% increase year-over-year. It's home to a handful of unicorns — private companies valued at over $1 billion. Farmers are getting more and more access to data, including agronomic data, better weather forecasts, market analytics, and global trends.

Yet one cannot ignore the fact that a handful of companies still dominate the grain trade, which is why the following announcement is so significant. This past week, the ABCDs of physical agricultural trading — ADM, Bunge, Cargill, and Louis Dreyfus — made a joint announcement on October 25th proclaiming the beginning of an investigation into new technologies to modernize agricultural trading.

This joint press release stresses how modern technology will enhance efficiency, reliability, transparency, and visibility. These last two items have not traditionally characterized the physical commodity space, which keeps data a tightly kept secret, allowing the majors to dominate global supply chains and reap large profits.

We’ll detail some of the topics covered in the press release, but this is a heavy one, so all our Hot Commodities editions can be found in our Hot Commodities Archive.

Blockchain in AgTech Modernization

Blockchain was front and center in the announcement, and it’s a topic that we just love to talk about. So where does blockchain fit in with the modernization directive?

There are clearly use cases for the technology, but design, structure, and acceptance are still major uphill battles. Back in January, LDC announced that, with Shandong Bohi, ING, SocGen and ABN Amro, they had completed the first-ever agricultural commodity trade through blockchain. A consortium of banks including SocGen and ABN announced in September a new venture in the blockchain space. And Carrefour set up a program to use blockchain for food distribution.

As we’ve said for some time and is noted in the ABCD modernization directive, one of the lowest-hanging fruits for blockchain use cases would be document management. This often takes the most administration time and effort in tradehouses. It’s crazy that in our modern age, traders need to mail a physical BOL to complete a contract.

Another area that the majors as well as other start-up companies are tackling is identity preservation in the crop supply. Tracking exactly where specific crops originated all the way through to the end user is a hot topic around the world, and will continue to be. A shared ledger using additional physical tools could easily integrate these.

Investments in the AgTech Space

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Greater visibility into supply chains and standardizing data technologies were a few of the benefits of this push to modernize.

We’ve been following a few of the major players in the farmer network and marketplace software technologies, and there have been some major raises in the past few years. We highlight a few of the companies below, each focused on farmer to elevator or farmer to end user section of the supply chain.

Farmers Business Network

Last November, Farmers Business Network raised $110 million in a Series D funding round. “Conceived by Farmers, Built by Innovators, and Improved Together,” FBN began as a network to level the playing field for farmers with insight into input costs and localized agronomic and market analytics. It advertised itself as a social network giving farmers the ability to pool data and knowledge and use aggregated purchasing power to gain better pricing.

From there, FBN moved into an e-commerce arm, selling input products like seeds, herbicides, and fungicides directly to farmers. FBN is currently in the process of building out a marketing platform for crops, using the network of farmers currently on the system.

Indigo Agriculture

In September this year, Indigo Agriculture raised $250 million in Series E funding, bringing total funding to $650 million, with a valuation totaling close to $3 billion.

Started as a seed technology company coating seeds with microbes, the company built a massive farmer network while also offering ancillary services. Using this farmer network, the company quietly built a grain marketing platform.

One of the Indigo taglines is “decommoditizing the agricultural industry.” In a time of low commodity prices and growing consumer appetite for organic and non-GMO products, this strategy has some legs. With the market boasting $8.6 billion cumulative nominal value of supply and $3.3 billion of demand, so far the liquidity seems to be robust.

Grainbridge

Concurrently with the directive to modernize global agricultural trade, ADM and Cargill announced a joint venture, Grainbridge, LLC. “The joint venture intends to provide grain marketing decision support, e-commerce and account management software for North American farmers,” according to the press release put out by the two companies.

The platform will be free and will offer an open approach, inviting other grain companies and buyers, as well as other technology and data providers, to participate.

While Grainbridge answers some of the hard-hitting questions that first come to mind — like, “Are ADM and Cargill combining efforts at my expense?” — there’s still a lot of information to be discussed about how this venture will work. How much of this is a reaction to competing technologies gaining steam and huge investment?

The final question, and seemingly a pedantic one, is the name itself, as a simple Google search leads to a company called GrainBridge that has been around since 2007.Grainbridge.com advertises as a “Professional Ag Risk Management Software.”

The announcement and questions above make it feel like this move is a defensive one in a growing landscape of interconnected data available to the average farmer. While the ABCDs have had mixed fortunes in recent years, but all around fairly positive performance, the cat’s out of the bag with farmers and technology. Farmers having more access to third party data will, at some point, cut into revenue and margins.

How much appetite will farmers have for a platform built by two of the most profitable tradehouses, in a time of incredibly low farm income levels?

PanXchange

Where does PanXchange fit in with these initiatives?  

Overall, we view these developments in a very positive light. The successes of FBN and Indigo, coupled with the ABCD joint statement, are an acknowledgement that major changes are afoot in physical agricultural trading. We have always defined PanXchange as a market structure solution, not just a front-end trading tool. While we have previously sought to enter markets first with the trading screens, then ancillary services such as back-office integration, we are happy to see the doors opening to discuss a more holistic approach to market structure. For example, as many of you know, we have just opened an office in Singapore. While researching new markets, we were pleased to see not only an appetite for PX to trade, but strong demand by the players to have that activity connect to their SAP and other back-office systems.  

Yes, the theoretical value of blockchain for physical commodities is enormous, but much needs to be done before mass-market adoption becomes a reality. As a market structure solution, PanXchange will be increasing our efforts to facilitate these discussions amongst players and coordinate industry-wide adoption of standard practices and procedures, beginning with harmonized documentation in global agricultural markets. This means coordinating not just with the ABCDs on their priorities and joint efforts, but serving as a neutral entity that fosters adoption of new practices, from the elevators to the shippers to the processors.

Please stay tuned for further developments.

Hot Commodities Edition 8: Earnings Season Special

Hot Commodities 8: Earnings Season Special

Earnings season is heating up, and we found some ambitious top priorities from the CEO of Cleveland-Cliffs, the iron ore and coal pellet miner. Here are his priorities moving forward, as outlined in the Cleveland-Cliffs Q3 2018 earnings call:

So we are going to screw these [short sellers] so badly that it will be fun to watch. That will be my first priority other than the two top priorities of finishing HBI and paying down debt. You are messing with the wrong guy. That's my message to you. I'm going to do with you exactly what I have been doing in Nashwauk for a while. So you're going to be the next in line. Remember, I don't have a Chewbacca anymore to deal with. You are my next Chewbacca, short.

And how is the CEO, Lourenco Goncalves, going to achieve these priorities?

...it will all be done to inflict maximum pain to these guys. I will wake up in the morning every day, looking at these guys and I go to bed at night every day thinking about these guys. And that's a bad place to be. That's the message that I would like to deliver in this call. Sorry, Lucas, that I jumped on your question…

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Oilfield Service: A Tale of Two Companies

The two largest oil field service companies, Halliburton and Schlumberger, notoriously give two starkly different forward-looking reports. So what were they saying for U.S. shale production?

Let's start with Halliburton:

Moving on from the fourth quarter, I’m excited about 2019. The catalysts are there for a strong activity rebound. These catalysts are, customer budget should reload with higher-priced decks and stronger hedge positions improving operator’s free cash flow and creating additional spending power. The rising DUC count will provide a substantial completions backlog ready to be worked down in 2019.

We believe that the market will get better in the first quarter of 2019 and sets up for continued momentum throughout the year. We believe that the fourth quarter of 2018 will be the bottom in North America land.

So Halliburton sees the current slowdown in oilfield completions as temporary issues and is calling the slowdown to bottom out in Q4, 2018, with the record drilled but uncompleted (DUC) wells growing, new takeaway capacity, and fresh operator budgets.

Next up is Schlumberger:

In this respect, we do not believe that the temporary off-day constraints are the main issue as this will largely be addressed within the next 12 to 18 months. Instead, we believe the main challenge in the Permian going forward is more likely to be reservoir and well performance as the rate of infield drilling continues to accelerate.

On a starkly different note, Schlumberger predicts that the current issues, and mainly takeaway capacity, will be alleviated, but U.S. production will slow because of these other issues mentioned.

Given that Schlumberger is better positioned for international and offshore plays and has a relatively smaller position in U.S. shale, the longer term bearish tones for shale should be taken with a grain of salt. The worries over long term reservoir and well performance have been around for years, arguably since the beginning of the shale revolution, and have thus far been proven wrong by breakneck year over year growth, catapulting the US to the top oil producer position (see image).

Frac Sand Update

Here’s a bit from this past Monday’s frac sand weekly update on what we at PanXchange are looking for during earnings calls:

"Another soft week in the frac sand market as many conversations are consumed with ruminations on where the market will go from here. As we head into earnings season, it seems the market is looking to hear from industry leaders to understand the prudent path forward. The comments that have dominated past earnings seasons — in-basin sand adoption, quality issues, construction timelines, direct sourcing, and last mile — are likely behind us. The market will likely be looking for answers as to who can lay out the best plan forward in this low-price, low-margin environment."

So how will sand producers tackle these obstacles? U.S. Silica was the first of the six to report.

SLCA Earnings

U.S. Silica was the first of the public sand companies to report quarterly earnings. A main topic throughout the earnings call was the expectation of idling production capacity. On a question of the pricing environment, CEO Bryan Shinn had the following to say:

At this point, we’d expect another 10 million to 15 million tons of capacity needs to be idled to rebalance the Northern White market and just based on experience, it will probably take a couple of quarters for that to play out and what we have seen in the past when these types of things happen is that there is some, I guess, what I will call, irrational pricing that tends to creep into the market as well.

So from of our perspective, we are going to stay discipline. We are going to maintain our share and probably grow our share a little bit and I think we are in a great position in terms of Northern White just given our asset footprint and where we are in the cost curve Jake.

The PanXchange sand team has talked for some time about the likelihood of mothballed and even closed sand facilities, particularly the northern white producing facilities.

One main issue mentioned only once in this earnings call is the topic of storage. As of now, large scale frac sand storage is essentially non-existent outside of on-site container storage like U.S. Silica’s SandBox, and some small silos at the mines. This winter should be an interesting test of the effects of adverse weather on the sand markets - temperatures below around 20° F and strong winds will slow and even shut down sand mining operations. Storage in the producing basins could offer an additional outlet to sand mines rather than every ton hitting contracted amounts or the spot market, easing some of the price pressure and capping a spike price in the winter should mines shut down. We’ll be listening closely in the next few earnings calls for mentions on this topic.

Upcoming proppant company earnings reporting dates:

Carbo Ceramics (CRR) - 10/25/2018

Hi-Crush Partners LP (HCLP) - 10/30/2018

Emerge Energy Services LP (EMES) - 11/06/2018

Smart Sand, Inc (SND) - 11/08/2018

Covia Holdings Corporation (CVIA) - 11/13/2018

ICE Houston Futures

The new ICE WTI futures with physically delivery to Houston started trading on Monday this week with daily volumes for the first three days averaging a few hundred contracts for the three prompt months. ICE reports earnings on October 31st. We’ll be listening closely for mentions of new contracts.

Blockchainia!

We know where we're going to relax after this busy earnings season! A restaurant in Nyeri, Kenya is now accepting bitcoin for meals.

Booking tickets soon.

Comment

Hot Commodities Edition 7: Dandelion Latex

Hot Commodities 7: Dandelion Latex

We’ve officially decided to change the name of the Hot Commodities 80s metal-ballad cover band.

New name: Dandelion Latex.

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Scientists and rubber manufacturers are teaming up to figure out how to grow a crop that is the bane of homeowners’ existence: dandelions. Specifically, they’re working on the Russian dandelion native to Kazakhstan, a cousin of the common variety that is a major weed in the U.S. The main problem with the Russian dandelion: growing enough of the crop. If researchers are able to overcome this hurdle and get dandelions to grow rampant, will there be a dandelion revolution in the U.S.?

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The global rubber market consists of natural rubber, made from latex present in many plants but produced only from the rubber tree cultivated in tropical climates, and synthetic rubber, derived from petroleum products, mainly styrene and butadiene.

Tire manufacturing accounts for the largest use by sector for natural rubber, and tires are made with a blend of synthetic and natural rubber. Natural rubber produces a more grippy tire, while synthetic rubber increases durability. Depending on the durability and grip requirements for the different uses of the tires, the percentages vary.

The overwhelming majority of natural rubber is produced in Southeast Asia, mainly Thailand, and Indonesia, and Malaysia and around 50% of the total demand comes from China and Southeast Asia (production numbers below). Natural rubber has seen a price slump in recent years, facing oversupply and slowing production due to environmental regulations from China, and the looming concern of a trade war.

So would making rubber from dandelion latexbe a worthwhile economic endeavor? Rubber prices have been in decline, sitting at multi-year lows, down almost 65% from the highs in 2011. Continental, one of the top global tire producers, claims to have built a tire made entirely from latex harvested from the Russian dandelion, but exact economics of production are not readily available. Under current market conditions where hub prices are below many established natural rubber producers’ cost of production, the chances of producing a new crop economically are slim. If there are any future disruption to international trade, and specifically in the APAC region, the optionality for a reasonably economic supply chain on U.S. soil could play out.

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New Futures Contract

Probably because of dandelions, the Tokyo Commodity Exchange (TOCOM) announced a new rubber futures contract, which listed Oct. 9th. In attempts to revitalize the exchange following a fairly steady decline in total trading volumes, which peaked in 2003, the new contracts are for technically specified rubber (TSR) in addition to the ribbed smoked sheets (RSS) contract. Tire manufacturers, and the rubber market in general, are moving away from RSS rubber -- which is made by hand and visually graded, and thus typically rife with inconsistencies -- towards TSR, which is machine-made and more consistent.

TOCOM’s main competitors in the rubber futures market are the Shanghai Futures Exchange (ShFE) and SGX group’s Singapore Commodity Exchange (SICOM) contracts. SICOM’s TSR contract tripled in volume from 2014 to 2017, trading just under 1.5 million contracts in 2017. But the ShFE dominates the market by volume, trading around 90 million contracts in 2017.

Any rubber futures contract is difficult to physically deliver, with buyers claiming that each individual factory produces significantly different rubber. For a buyer executing a purchase on a futures contract with multiple FOB delivery ports, this makes the process particularly challenging. Many buyers claim they would never take delivery on the futures contracts available, as they would have no idea what they would be getting.

Frac Sand Update

Here’s a snippet from our weekly sand update:

“Contrary to very weak market conditions for sand suppliers, there have been comments (for the first time in several weeks) of operators considering the switch back to northern white due to low pricing. The adage that "the cure for low prices is low prices" is certainly coming to fruition in the frac sand market, and we may see some opportunistic buying occurring in the northern white market. This sentiment will certainly be one to watch in Q1 as activity is guaranteed to pick back up.”

Our frac sand team will have an update on forecasted Q1 completion activity in the near future. Click below for information on our data offerings.

Trafigura Spinning off Impala

Trafigura is spinning off and selling 50% stake in Impala Terminals, the wholly-owned subsidiary that owns and operates ports, terminals, and warehouses around the world.

The move comes after a tough year for Trafigura, with gross profit down to $979 million in the six month period through March 1, 2018, down from $1,238 million in the same period 2017. The core Oil and Petroleum division accounting for 69% of total group revenue was hit particularly hard, with profit dropping to $221mm from $470mm over the same period.

With wide crude quality and locational spreads for the second half of the year, Trafigura profits likely turned for the balance of the year.

Lumber Markets

Farmers in the Southeast U.S. are facing pressure as a major federal program started decades ago is coming to fruition. The federal program, started in the 1980s, offered farmers a subsidy to reforest land cleared to plant tobacco, cotton, and grains. The program was aimed at propping up crop prices depressed by acreage increases, as well as help fix erosion, water quality, and flooding issues. The pine in the South is now ready to harvest, and the true scope of how many farmers planted a few decades ago is becoming clear.

While national lumber prices recently hit record highs, mills in the South are running at full capacity, and freight costs for raw timber are too expensive to make shipping the raw material across the country to other regions economic. The result is that the “saw spread” is high, mills in the South are making record profits, and a slew of investment in mills in the South has been announced.

Will the farmers who planted see any of the benefit? With the glut expected to continue for years to come and stockpiles still at record highs, the trees might be sitting in the forest for a while.

Blockchainia!

Comment

Hot Commodities Edition 6: Soybean Woes and Energy Flows

Welcome to Hot Commodities Edition 6: Soybean Woes and Energy Flows

Welcome to Hot Commodities. This bi-weekly newsletter uses the PanXchange team’s experience and knowledge in physical commodities to bring you perspectives on what’s happening in the elusive, opaque domestic and international markets. And, of course, we're going to keep you up to date on blockchain -- what's working, what's practical, and what's downright lunacy.

Soybean Updates

Farmers across the U.S. are feeling the heat as the USDA estimates September soybean ending stocks of 845mm bushels, up from 60mm in August, and a whopping 300mm bushels over September 2017. November futures are hovering around $8.50 per bushel, with cash prices across the U.S. equally as worrying. Delayed pricing service charges are up significantly year over year, and farmers without on-site storage anticipating better pricing in winter or spring will be at the whim of available storage space. Iowa, the second largest state agricultural economy in the U.S., will be hit particularly hard by the tariffs, with an Iowa State University analysis projecting Gross State Product (GSP) to lose $1 to $2 billion dollars due to the tariffs.

While U.S. prices including the 25% tariff have fallen enough to be competitive with what is still available from other origins, Chinese traders are hesitant to risk purchasing cargos and being ostracized by the government. The soybean tiff goes beyond just a tariff, and Chinese traders -- and particularly state-owned enterprises -- will exhaust every available alternative, even when U.S. origin soybeans are economical compared with other origins.

One alternative strategy discussed at an export conference by Mu Yan Kui, vice chairman of a trading subsidiary of Singapore-based Wilmar International, is to change hog feed rations from average 20% inclusion down to 12%. While commercial U.S. feed operations build different rations based on regional commodity access and least cost rations, U.S. average of soy inclusion for hogs likely averages around 20%, but that’s largely due to availability of soybeans. European feed operations, which import a large portion of the soybeans they consume, use a ration closer to 12%, with the balance made up of corn.

U.S. farmers aren’t ones to shy away from hardship, staying resilient through bumper crops and droughts, using risk management tools like futures and options contracts, and integrating data like weather and satellite imaging. But the real question on farmers’ minds is what will be the long-term damage. Chinese feed ingredient companies have been reluctant to switch to the lower soymeal rations, but this might accelerate the transition. China is already pouring billions into developing nations through the Belt and Road Initiative, and has the ins to easily transition into agriculture in places like Kenya and Uganda, with vast arable land but relatively low yields per acre. David MacLennan, CEO of Cargill, spoke of these long-term effects in a Bloomberg interview.

Markets are indeed dynamic. Winners and losers in a new market structure after the cool-down have yet to be chosen.

Frac Sand Update

Are there international export prospects for U.S. frac sand on the horizon? Here’s a snippet from our weekly frac sand update:

“With a recent uptick in Vaca Muerta activity, and the lifting of a temporary ban on U.S. origin frac sand, this may become a competitive source of demand for an over-supplied U.S. market.”

The Vaca Muerta shale play in western Argentina is hot on IOC’s minds, with EIA estimating 16.2 billion barrels of technically recoverable oil and 308 Tcf gas, the highest in South America (see chart below), but infrastructure and technical challenges have limited growth to essentially zero production. Will expertise and sand exports from the U.S. help spur a revolution in Argentina? The frac sand import market is heavily brokered and business practices in South America are often very risky, but the South American market could be a huge opportunity and outlet for the frac sand market, which is experiencing a supply glut from the sand mine boom.

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CME Crude Futures

CME Group released new information on the WTI Houston light sweet crude futures. The contract, scheduled to launch in Q4, will be physically deliverable to three Enterprise Houston system locations, pending approval. Crude will be deliverable at Enterprise Crude Houston (ECHO) terminal, Enterprise Houston Ship Channel (EHSC), or Genoa Junction.

The press release says that the new contract “expands CME Group's already robust suite of crude oil futures and options and will complement the global benchmark NYMEX WTI Light Sweet Crude Oil futures,” but how much of that liquidity will be cannibalism from the WTI Cushing contract, and how much will be organic growth?

Companies have invested billions in physical storage and flow monitoring around the Cushing hub, with stiff competition in storage forecasts. But the hub has become less relevant and more of a stopping point for U.S. and Canadian crude flowing to the gulf complex for refining and export.

With volume on primary benchmark futures contracts regularly hitting all-time records, the total amount will certainly continue to grow, but the split between where the volume flows will be very interesting to watch.

More LNG Players

More new entrants to the U.S. Gulf trading as Cheniere Energy, owner and operator of the Sabine Pass LNG facility in the Gulf of Mexico, announced a long-term off-take contract with Vitol, the world’s largest oil trader, moving over 7 million barrels per day, and trading 7.4 million tons of LNG in 2017.

The 15-year contract is priced at Henry Hub plus service fees signals more interest from traders and merchant outfits to take risk on spot transactions as the LNG market structure continues to develop. The new CME physically delivered LNG futures will require as much liquidity as possible.

In tandem with this new partnership, a consortium of major players backing LNG Canada is set to announce a $31 billion investment in an LNG export terminal out of western Canada. We'll update you on progress in the next edition.

Blockchain News

A consortium of banks and physical oil players announced a new blockchain venture for the physical oil markets. This particular use case is interesting, as the companies are aiming at two specific pain points in the trade finance industry: KYC documentation and digital letters of credit using the Ethereum blockchain.

As we’ve mentioned previously, focusing on one specific pain point in the supply chain will be key to success. Letters of credit (LOCs) require excessive amounts of physical paperwork, signed and overnight-ed between counterparties. Papers get delayed and lost, pieces go missing. Digitizing the document transfer in a secure and encrypted way offers significantly value for physical traders. We’re excited to see where this goes.

Hot Commodities Edition 5: Hopped Up on Lithium

Hot Commodities Edition 5:

Lithium Market

Malt Hops

Frac Sand Update

Blockchain Alliance

Hot Commodities Edition 4: Texports and Vanillionaires

Hot Commodities Edition 4 Topics:

Texas Oil Exports

Frac Sand Update

Vanillionaires

Soybean Update

Blockchain Update

Hot Commodities Edition 3: LNG and Cocoasolidation

Hot Commodities Edition 3: LNG and Cocoasolidation

Hot Commodities Edition 3 Topics:

LNG Market Evolution

Frac Sand Update

Deconsolidation of Cocoa Markets

Blockchain Updates

Hot Commodities Edition 2: Truckers Sqeeze and Glutenphobia

Hot Commodities Edition 2 Topics:

Wheat is Feeling the Heat

Frac Sand Update

Houston WTI Futures

Trucking Shortage

Blockchain Perspective

Hot Commodities Edition 1: Blockchaina! and Trade Wars

Edition 1 Topics:

Who are the winners in trade wars?

Frac Sand Update

New Futures Markets

Blockchain Perspective