Archive for June, 2011
Charts & Adendum For Barron’s Article “Hungry Hogs Lift Corn Prices”
This blog post is an adendum to my article Hungry Hogs Lift Corn Prices in Barron’s Commodities Corner column today, I included these charts in the original draft, but we had to pull them to make room for the text. You can click on any of the charts for larger and clearer images.
The chart above offers some perspective on the global hog market. China not only has more hogs than the next 43 pork-producing countries combined, China has 1.5 more hogs than there are Americans in the United States…and they all have to be fed. (Chart source: United Nations Food and Agriculture Organization via the 2011 Milken Institute Global Conference).
This chart shows the disparity between hog prices in the United States versus those in China. The reasons why are delineated in the Barron’s article. This disparity is what can lead China to import our hogs and put duress on US lean hog prices. (Chart source: Arlon Group)
The chart above shows just how much China relies on the market to meet its need for soybeans. Once they import the soybeans, the beans are “crushed” as it’s said, to create soybean oil and soybean meal. A whopping 98% of the meal is used for the 20% blend in hog feed that I mention in the Barron’s article. [Soybean oil is used for human consumption: cooking oil and salad dressing, for example.]
At the end of the day, China has only 7% of the world’s arable land, yet they consume 20% of the world’s grain production. The delicate balance between grains (corn and soybean meal) and hogs means that one outlier event, or better, one more horrible estimate from the USDA/Wasde and the whole grains/hogs complex will go parabolic.
Erin FitzPatrick, a phenomenal grains analyst in her own right at Rabobank, has much tighter expectations for the already historically-low corn stocks-to-use ratio this season. Erin’s forecast is at 4.0% (I’m with her), whereas the USDA’s are at 5.2%. To put that into perspective, that means the US is going to finish this crop year with about 7-weeks supply.
In equities, you may hear the expression, “stocks are priced for perfection.” I think that is the case for corn and soybeans in the commodity futures market where we saw limit moves this past week. Non-directional volatility, or equity whipsaws, are the norm. Therefore, I would trade small and conservatively. Don’t be a hog.
Read MoreFox Business News Appearance – Crude Oil Prices, Drilling Permits, and SPR
I was on Fox Business News a few months ago for “Street Fight.” You can see for yourself who you think was more prepared. (Hint: It wasn’t the other guy.)
The President had RENEWED drilling permits that had been put on hold, they were not NEW permits that would have ultimately lead to higher supply in oil.
– The oil market needs to have Frank/Dodd enacted to put a halt to HFT. We don’t need higher fees.
– Margins have been higher for investors forever. Margins are much lower for end-users.
President Obama has put the country in a much worse situation by drawing on the Strategic Petroleum Reserves (SPR), mostly for his political benefit. The last thing President Obama wants will be high gasoline prices coming into Election campaign season. Now should we have a real emergency on our hands, we have less “dry powder” because it was spent for political capital. That’s not leadership by any measure.
Like currency interventions, trying to bolster the near term supply will not affect distant prices, and tapping the SPR will fail. Moreover, higher prices in the deferred months encourage STORAGE – which takes supply AWAY from the cash market. Why? If the front months are lower than the deferred months in the commodities calender, owners of physical crude oil are encouraged to store the crude oil now to obtain higher prices later.
The long-term drop in demand for crude oil will come from tax credits for alternative energy sources, approving near-term crude oil drilling permits, and most of all, conservation by Americans. That’s how President Obama can create an national energy policy that is efficacious now and for future administrations.
The market premium in crude oil prices above the factors of supply & demand is determined by global forces…not a central bank, nor some mystical commissar. The futures market is not supposed to be based upon supply and demand, but the threats and dangers to global supply and demand.
When all the analysis is done, hedgers and investors affect the first function of the commodity futures market which is to transfer risk between themselves willingly. In the process, price discovery occurs, the second function of commodity futures markets.
The same argument can be made for any discount the market participants determine by their collective buying and selling. Market participants include buying and selling hedgers, and buying and selling investors.
For more insight from someone other than me, Reuters analyst John Kemp has written extensively on crude oil trading and the factors involved in the overall pricing mechanism.
Read MoreWant To Trade Better? Meditate On It
“Mindfulness helps you to build what I call ‘mind strength,’ ” Alexander says. “Your awareness and consciousness become really toned. This is an excellent strategy for becoming successful in your profession, as well as the bigger game of transforming yourself and the people who work with and for you.”
There’s a really great book coming out on how to trade better later this year.
Read MoreMeanwhile, Back At The Ranch…
Whitey Bulger Caught: Exclusive From Guys Who Caught Him
Whitey Bulger, the fugitive Irish mob boss who Jack Nicholson depicted in the movie The Departed, was nabbed in Santa Monica, CA yesterday.
A good buddy of mine who is on the job spoke to me on the condition of anonymity about how the arrest went down:
Police: “Do you know why we’re here Mr. Bulger…Do you know what we do?”
Bulger: “Sir, yes, sir. I have an idea…”
Police: “Whoa, whoa, whoa. Let’s say you have no idea and leave it at that, okay Mr. Bulger? No idea. Zip. None. If you had any idea about what we do, we would not be good at what we do now would we? We would be (another word for film producers). You calling us (another word for film producers)?”
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