Agrochemical Mega-Deals Could Reshape Industry, BI's Miner Says

Dow Chemical. That's because the European Union approved the merger of these two agro chemical behemoths to create an even bigger company. To get a better sense of what this means going forward is Jason Minor. He is senior Global Chemicals Analyst for Bloomberg Intelligence and it comes to us from Princeton, New Jersey. Jason, can you just give us a sense of how unexpected this was that the European Union would approve this deal? Well, on in one sense,

it's you know, it's been widely inticipated. I mean, we've been watching this deal. This is really a shape shifter of a deal, remember, because it's such a huge behemoth merger and then a three way split up. But we've been watching that unfold or sort of rumble forward. Since two thousand fifteen when it was announced, the companies have said that they were expecting to close this in the

first half. They have missed a couple of deadlines before, and we're in a really mind boggling climate for regulatory sort of antitrust approval and accempts a lot of deals so um. On the one hand, it was really foreshadowed. The timing though, and many folks mind was was uncertain, and there were those who would even thought that the divestitures required to be so massive that they might undermine the value. So maybe it's a little bit more minor

or manageable than folks expected as well. So just to give some perspective, and some of the things we were talking about, I mean, there are a bunch of combined transactions, uh that are going to reshape the agrochemical industry, bears planned by Monsanto and China National Chemicals agreement to buy some Genta that would bring the six major players in

this industry town to just three. Uh. The surprising thing to me was that the European Commission said that there was specific evidence that Dow and DuPont would cut back on the amount they spent on the developing innovative products. I mean, what is going to be the ramifications from this complete reshaping of the agrochemical industry. Yeah, you have to to to feel the fear. You've got to put

yourself in the seat of the tractor. Right. So the fear is the farmers looking at this as exactly what you said, which is these labs have generated the yield gains around the world, particularly for corn and soy, but many other crops for for decades now. Uh. And as we as we put these all together, all the names that you've just mentioned, Um, we're potentially cutting back on overlaps, right and now do pot have promised US three billion

cost synergies alone? Uh? And And obviously under the hood of that, the EU saw some specifics that looked like it would be a few less test tubes devoted to crop chemicals. So it raises a question though, who's left out there. It's a strong hand that can buy what

comes out of this as it's spent off well. And then it raises another question to which is what is the advantage for these mergers if not for eventually jacking up prices or having or cutting jobs to such a degree that they are much more efficient, right, I mean studying the context. Remember we're we're in now, we're about to nominally break three years of declining farm incomes. It's been tough times. After biofuels kicked in after two thousand five or so, we had a big boom, a lot

of investment. All these companies are looking to cut back now, from fertilizers to seeds. Everybody spent a ton and and so ultimately, I think the first wave really is cost cuts. Then if you get a little rise in some of the crop prices, you're right, that could have played into a lot of pricing power. So now the stipulation is you've got to find strong hands to put this thing in that will continue to compete with you. We've gotta

keep five strong players out there. Who this fifth is going to be is is really uncertain because it will be a big transfer, your national deal for any of the leftover players probably who could do it? What what parts just to that point, what parts are going to be spun off? What businesses are going to be for sale? So what we're taking out is a piece of DuPonts. No, they haven't sized it one good reasonably guess it's a

couple of billion dollars of sales a year. It's it's a a bunch of um insecticides and herbicides, uh and then and and they so they name specific products, but really the key is the R and D lab. They said, you can't take those, uh, the TAO and the DuPont R and D programs and put them together, which is

obviously where that cost concern came in. You've got to hand that that R and D development and all of your upcoming products, which again it's really the core that the existing portfolios weren't the worry so much as UM you've got to put the place where the magic happens. You've got to keep that lab alive. You've gotta hand

it to somebody else. UM. So, so it's a it's a few, it's herbicides, insecticides, and then the R and D program, which is a key Jason, does this at all play into the debate over genetically modified grains and and other types of foods? I mean, I know that Europe has been much more against genetically modified UH food whereas in the US it's more accepted. Yeah, links in

two ways. So one of the concerns is, um, what's happening in all these deals is you're putting together big seed players who have done the biotech stuff with big chemical players. UH. And there's those two things go hand in hand. You often engineer a seed to work with a chemical or a spray, So it's a sort of a seeds plus sprays world we're going into. UH. But it can mean that if you have only certain sprays, you only engineer certain seeds, you reduce innovation that way.

On the other hand, there are alternatives to GMOs that can come out of these labs, and we want to see those alternatives come to fruition. I think Jason Miner, thank you so much for joining us. A fascinating development in the agrichemical industry. I'm sure we'll be talking about it more coming up. Jason Minor is senior Global Chemicals analyst for Bloomberg Intelligence, and he was speaking to us from Princeton, New Jersey. Many people thought that volatility was dead.

Well today it seems to be showing that perhaps it's not quite dead yet. We see the VIX index at the highest level of the year, and there's somebody perfect to talk about that today Rick sell Vola, CEO and co founder of Harvest Volatility Management. It's as hedge fund uh that overseas nine billion dollars of assets. Rick, thank you so much for joining us. I want to start with a VIX. We are seeing it tick up from

a historical perspective. It is still incredibly low. But are we just seeing the beginning of this swell in volatility and equity markets? Thank you, Lisa. I think it's a pretty good way to think about it. The the fact that the SMP hadn't had a one percent pullback since early October, and we finally saw one late last week and are continuing to see that today. Umans the VIX

is waking up, and so UM. The VIX is long term average, you know, is around twenty uh interesting, the last five years or so, the average has been closer to sixteen. So UM and to be clear, it's still less than fourteen, so it's still really low. It's still it's still low. It's it's it's traded closer to you know, eleven twelve area for much of this year, as we've just seen a very long, sustained rally without any real pullbacks,

any real reason to be fearful. But UM, you know, now you're seeing markets wake up to the fact that, hey, stocks go up and down and everything that maybe was priced in perfection. Um, maybe there's some questions and and so now there's more reason to either be fearful or to um to realize that. You know, we could see a bit more chop and more reason to buy protection. But your fun doesn't. It doesn't really bet on the

direction of fatility. It's not like you wake up every morning and say, ah ha, we're gonna finally get it, um. And if we don't get this pop in volatility, we're gonna get sunker we do, and we're gonna we're gonna we're gonn to win. Um. You're just betting on incremental changes in volatility. Correct. Um, that's close. You're like, you're right, we're not making judgment calls on the VIX and we're

not making judgment calls on volatility. UM. We are a perpetual seller of volatility, but with limited risk, meaning we use spreads, so we try to sell the expensive options but by the cheap options to limit our risk. So another way to think about it is, UM, you know there is a perpetual richness of implied over realized volatility that's been in place since the eighty seven crash, and it's about three and a half four percent, and we're

trying to exploit and harvest that UM. And there are many different ways you can do that, but we utilize index options on the SMP five hundred. You know, the deepest most liquid market UM. You know, liquidity transparency low, you know, execution costs, etcetera. UM. And for taxable investors, there's actually tax efficiency in using this SPX index option.

So Rick, you're FIRB started in two thousand and eight, and one thing that I'm struck by is you're looking to get returns of one and a half to two percent that is sort of overlaid on top of returns that investors are already getting on their other capital. In other words, Uh, their investments are used as collateral for you to go out and make these synthetic wagers. Uh. And your goal is to gain that sort of incremental extra yield. And in the process you have amassed nine

billion dollars. To me that this raises a question about the hunt for yield. And you know, if yields do go up, our investors still going to be seeking this incremental yield. And you know, does it also represent potentially that people are are looking too hard for it? Great question. Um, the we are very much the tortoise. This is a this is not a sexy, glamorous strategy where we're looking to hit it out of the park. Um. But when you can add one and a half to two to anything, um,

you make it a lot better. Meaning if somebody's long equities and you can add one and a half to two percent, that's kind of take you maybe from the middle of the pack to the top desctile. But but you can also lose, right well, you can also lose. Of course, you can't add risk without adding um, you

know the possibility of loss. So uh. Part of what we do is, you know, we're selling out of the money spreads on the upside and on the downside, which is another way of saying, um, a part of the return profile distribution of the SMP to the up and to the down. We create a nice wide band so the market can go up or down and we don't really care if it goes up too far too fast. Um, we're gonna lose a little on the call spread side.

But we're gonna win in the foot spread side, etcetera. So, so do you have certain models to get a sense of when we are going to see these big swings in volatility? You know, the VIX is more reactive than predictive. Um it will um, it will wake up before big known on owns like you will see it um higher in front of an election, higher in front of a FED meeting, higher in front of monthly non farm payrolls.

When there's an event that we know is there, but we don't really know a what the outcome will be and and and be how the market will react to that outcome um so um. But we don't have models that are going to tell us what is going to happen. We more react to it. But we have a lot of experience and and we're also looking at the curve and looking at where things look reature and look things like cheaper, etcetera. But you've been in the business for decades, right,

and so you've been watching the cycles. And is there anything that gives you a sense that we are going to see a more dramatic swing in volatility this year? Um? I don't know. I'm not sure if it will be more dramatic, but I do think we will see UM higher levels of volatility. I think we'll see UM more frequent spikes, just because there is such great uncertainty, whether

rits UM, political uncertainty, economic uncertainty, global uncertainty. UM. I frankly and many of my colleagues have been really shocked actually that the VIX has remained as low as it has for as long as it has, you know, since the election UM, and I think today is is probably more like what we're going to see going forward. UM. We will see the occasional drop down below twelve or so, but I think a VIX in the mid to higher teens is is a more likely outcome. Where are most

of your investors from UM? Most of our investors at this point are ultra high net worth either individual investors, families, but we partner with firms like Mary Lynch and UBS and Morgan Stanley, and so their advisors see the value in adding harvest to their client portfolios. They see what it does to the risk adjusted quality of the returns

UM and so well. One thing that somebody could argue is that your fund has been around since two thousand and eight, but it has really been Uh, certainly not in its current form. Has not survived through a crash. Um when you actually volatility is going to be the flash point. So you know what happens then, right, I mean if you have all these alternate worth people who are looking for uh, you know, an extra one percent, but it could be a lot more downside in a

hurt cycle. Yes, a great question. Um. You know we launched in April of oh eight, so we did weather the financial crisis in the fall of oh eight. I mean when you look at what the SMP did from September of eight into early March of oh nine, and that six month window the SMP was down. Um, we've weathered a VIX that quadrupled you know, it's long term averages twenty and that's about where it was when we launched. You know, it doubled to its previous all time high

of forty in September of eight. It doubled again to eighty in in October in parts of November of eight, so um, we did weather um quite a hilacious downturn and uh and spike involved. And then the flip side is equally challenging. When the market surges the way it has and and VIX has been more constrained. So well, we'll have to check back with you when the VIX wakes up a little bit more from its current levels.

Rick Silvala, thank you so much for joining us, CEO and co founder of Harvest Volatility Management, which has nine billion dollars of asses under management. Well, it's a sad day, and they say a sad day in UH the s n P five hundred. It is the sixth day of falling UH index values. What do you make this, Dave Wilson, Well, I also like to look at the down Jones Industrial Average downy alright, fine, and if it closes lower, it will be the longest losing streets since August when stocks

were really kind of falling out of bed. And what's interesting is if you take a step back and think about what's going on, it almost looks like the flip side of what we saw post election, where you know, you see stocks go up day in and day out pretty much but not very extreme moves. And you look at where we are now, it's sort of a similar situation. You know, down down eight days in row. You're talking about two and a half percent. Okay, but hold on

one second. Though you raise an interesting question, Dave, which is, if we're seeing the reversal of the post election Trump bump, how much further do the SMP five hundred and the doubt jones have to fall to leave us flat. Well, there's still quite a ways to go. I mean, you look back to where we were just after the election, you see UH change. That's where the SMP started out, and we're about close to two hundred points higher than

that even with today's decline. I mean, you can run the numbers on the down you see a similar UH potential role And it really comes down to at this point, you know how much of this is sort of people looking for an opportunity to sell, especially as you get close to the end of the first quarter, as opposed to real concern about the state of the policy agenda, if you will, given the fact that the healthcare bill did not manage to get a vote in the House

last week. Well, the flip side to the risk off trade is the bullish trade for treasuries. And here with us is Brian Chapatta, who writes about treasuries and UH and generally for Bloomberg News. Brian, you're a really compelling story talking about how the cost of buying treasuries and hedging against any dollar moves for Japanese investors has actually fallen to the lowest in two years. It should make

it a buy for them. They should be rushing into the US to capture the extra yield given how cheap it's gotten, But they're not. Why they're not because they're just worried about fiscal policy and monetary policy here in the U S which is seen as way more volatile than over in Japan, where it's you know, persistent easing on the monetary front and there's nothing going on on

the fiscal side that's going to jeopardize things. I mean, in fact, their tenure rate is basically fixed between like zero and ten basis points, so they find it's much more attractive, but potentially to just stay home and you know, take the paltry yield that they got rather than you know,

risk further losses. The losses on the treasury index, the Boo Bloomberg Barclays Treasury Index on the final quarter of sixteen was the worst that it's ever been in data going back about thirty years, so uh, it was it was a surprising loss on their books. So I'm looking at the ten year. It's down the most in uh about two weeks. I'm wondering, you know, the yield is down, the prices up. I'm wondering, who's buying, if Japan is not buying, if China's not buying, if European investors maybe

are staying home. I mean, who who's coming into the US right now? I mean it seems like in part it's you know, the flip side of you know, the equity markets. You know, people who uh you know, we're potentially you know, betting against betting un interest rates going higher, essentially shorting the treasury market. Uh. Then I have to cover some of their shorts as they're seeing a risk off here in the market. We saw the specula the

position UH in shorts really decline over the past week. So, um, it seems like it's a lot of that, and um, you know, I think the real interesting thing is that a lot of these uh foreign investors that were sort of hesitant seeing a FED poise to raise rates are really caught in limbo here because they missed out on a on a nice rally. But now they think, oh man, we're at the bottom of this range that we've been

in for the past few months now. I don't want to buy either, so they're sort of caught, uh in limbo, which is not great for their demand. Well, Dave, to that point, there was a story that Matt Levine highlighted in the World. He's a Bloomberg columnist. Uh. The story was in Wall Street Journal, quoting in Investment Manager saying, it's like dental work. You dread it, you don't want to get it, but you're glad when it's over and

you feel better. What is he talking about. He's talking about a correction, Like everyone's been sort of praying for this pullback in equity so that they can get in a better valuation. What are you hearing from investment funds? I mean, is this is this the time to get back in or people waiting for it for a lot more? Well, I mean, if you think back over the last year or so, I mean, we've certainly seen plenty of times when stocks have dipped, and you've seen so of recovery

in short order. You know, the question is whether this time there's something more gradual going on that will take more time to unwind, sort of like you say, you know the the trunk trades, if you will, So you know that that becomes the issue for the moment, and you're certainly seeing that play out today within specific industry groups. You look at the banks, they're lower. You look at

the steel companies, they're lower. You know, the banks were supposed to benefit from deregulation, the steel companies from infrastructure spending. And of course you've got the hospital stocks taken off because the repealing and replacing the Affordable Care Act hit its bumps. So you know, it's just a matter once you get to shake out, where do things go from here?

And Brian, I mean when you talk with sources, do you get the sense that uh bond investment managers are generally kind of moving toward a or back toward, I should say, a slow growth for longer type of environment. Are they basically pricing in the same kind of environment that people were talking about last year and kind of ignoring and casting off the brief reflation hopes that we

got after the election. I think that's the underlying tone of the market right now, is that you know, how much has changed from a year ago, and I think it's going to take a few days to shake out here. Exactly if you know, this is the death of the reflation trade that we've been seeing since the election, um or if there is still that potential because we haven't seen treasuries break out of arrange that they've been in

since basically the start of December. UM, because there's just been this back and forth of you know, just sentiment, I mean, will that you know, will growth take off or will it be subdued? You know what what's going on with inflation? Is this going to be a persistent thing going on? And so um, It's gonna take a little while to play out, but I think the underlying tone definitely is you know, how how how sustainable is this?

And just to sort of underscore the confusion, New York Fed President Bill Dudley has said that he is comfortable with a gradual rate hiking cycle, that the economy will

cope just fine with that. But James Bullard, another FED president, thinks that potentially it's overkill, and he said in a Bloomberg television interview that it's not necessary to raise rates that quickly if the goal is to keep inflation in your target and keep employment unemployment between four and four and a half and five percent, so definitely clearly an

important debate. Anyway, Thank you so much, Brian Chapota. When you think of the Dodd Frank Act, which is something that President Trump would like to overhaul, or that's what he has promised to do, you think of trading rules, you think of bank profits, you think of things that are really isolated to the financial sector. But that's not necessarily the case. Elizabeth Dexheimer, finance reporter with Bloomberg News, reported on another part of this law that affects retailers

as much as it does the financial companies. Elizabeth, thank you so much for joining us. Can you just give us an overview of this part of the law that has to do with swipe fees or how much retailers can are charged by the banks uh per each transaction for debit or credit cards. Yeah, at least it's good

to talk with you, so sure. This is UH. This is an issue that really gets the heart of how financial companies thanks payments firms like z and master Card make money from gebit in credit cards, which is a very lucrative business. Every time you used swipe your credit card. UH, one big chunk of it of the money that banks make is something called interchange fees, which are fees that are charged to the retailers UH every time a card.

Is why those fees, particularly for debit cards. As part of Dodd Frank, there was a provision that was added that capped those fees for debit cards. About nine billion dollars has been lost to the banking industry and revenue because of that provision, well and just the direct The opposite side of that is that retailers have kept nine billion dollars in profits right right, and they argue that they have been able to translate that to lower prices

at the register for consumers. So you have these two you know, the homes of industry UH. You know, we're talking about Walmart, JP, Morgan, as well as lots of small businesses restaurants uh. And then as well as on the banking side, this uh stems to small banks, community banks, credit unions that have all felt the effects on this

ston on either side. And so as the House of Representatives in particular takes up this debate around what a package would look like to overhaul Dodd Frank's an updated package, one of sort of the sticking points that has come up is whether or not to include a repeal of this provision. Thanks would like to see a repeal of that provision. Retailers want to keep it as the law

currently is right now. And that's put lawmakers in a very sticky spot, both Republicans and Democrats, because retailers and banks are a very big and important constituent for most lawmakers as well as an important political contributor from both sides. So the lawmakers would prefer to continue to put this off. As you sort of highlighted, you had a great list of responses from a number of both Republicans and Democrats, things like, we're listening to everyone, we haven't taken a

position on this yet. If you contact our office, we'll talk to you about that at another time when I'm prepared. I love the quotes. That's sort of just this sense of wanting to kick the can down the road. And just to be clear, this is the Durban Amendment UM And can you give us a little bit of color, Elizabeth about how much money and time and how some

of these industries are law lobbying for their perspective. So so this is really just the latest battle and what has been a nearly decade long fight between these two industries on Capitol Hill. This has also stem to the courts. This is um you know, an issue that has also come up just in business negotiations and of course recently ever since you know, Donald Trump was elected and sort of the conversation around broader god frank changes was put

on the table, if you will. Uh, they've been both sides have been ramping up their their lobbying and advocacy efforts. One of them one of the strategies a lot of similar strategies that they that both sides have been using for for many years, but again sort of really ramping up, particularly relying on smaller constituents, uh, you know, relying on the small banks, relying on small retailers to religious storm Capitol Hill letters, phone calls just NonStop, uh you know.

But but it's effective, and that there are so many that these constituents, you know, making noise in any one on Maaker's office is you know, gets the attention of

that that lawmaker. Right what what what I mean? I don't know one thing that that does This does raise to me is potentially the banks could say, look, we're competitive, We're trying to compete with one another all that this cap does is removed the sort of inherent competition and remove the playing field in a way that potentially limits innovation or uh, you know, creates sort of ripples that might not be desirable through markets. What what do the

retailers say to that? Sure, so there are both sides, point to various data and studies that have been done about the impact. Uh and quite frankly, it's it's not conclusive and that there you know, different sets of data tell different stories. The as you just pointed out, the level playing field and the competition factor that that banks will will cite. Retailers say that the the way that these prices are are are putting other an input out

there is not fair. They have no real shay and sort of how these prices are are determined, and that by lowering the fees that they have to pay, they can in turn lower fee lower prices of anything that

you would buy at the register. Although although you have to wonder, I mean, if people are going to be using other methods of payment, if you know, they just pass along the charges for credit card transactions right right, and and even that point about where the consumer sees the savings If a consumer sees sees any savings from this. That data is inconclusive as well. There have been some studies that show that retailers did not actually do make any changes, or if they did, it was actually to

raise fees or excuse me, raise prices. That this did, you know, little to impact the you know what, what

they're being charged. And yes, absolutely there's other forms of payments, and that's where the sort of what's really at stake for for this conversation in general is that, yes, this particular part is about choosing around the Urban Amendment, specifically as it relates to debit cards, but this is also about a broader conversation about credit cards, which is a much more lucrative business as well as sort of future

when we're talking about a new technology. Unfortunately, Elizabeth, we have to leave it there, but thank you so much. Fascinating story. Elizabeth Dexheimer, finance reporter for Bloomberg News. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter.

At Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio