Livestock thoughts

This article is interesting

The most recent documentation of the stingy spring at hand was unveiled Monday when NASS took its first shot at rating pasture and range conditions across the country. If this had been the equivalent of a report card from a strict, one-room school, many ranchers would be asked to repeat grades one through six.

As a whole, this initial assessment of new grass was the bleakest in 15 years. The average rating as of May 2 for the continental U.S. was 76% (i.e. in fair or better condition), 17 points below the earliest reading of 2010, 7 points short of the four-year average, and representing the poorest start to the grazing season since 1996.

Of course, the national average was significantly skewed by the bleak dryness across most of the Southern Plains: Oklahoma, 49% (90% in 2010); Texas, 25% (89% in 2010).

Nevertheless, one is hard-pressed to identify a consistent area of the country where lush and tall grass now apparently waves. Only four major cattle states earned a rating of 95% or better: California, 100%; Mississippi, 97%; Missouri, 95%; Nebraska, 95%.

Why do you think August and October live cattle futures have dropped $8-$9 below contract highs set in early April? My guess is that a big part of the sell-off has been fueled by a growing fear that second-quarter feedlot placement will be much larger than previously imagined as would-be stockers are necessarily redirected to the bunk line.

Unfortunately, the bearish weather of this strong spring is also attacking the red meat market in terms of demand. Cool and wet conditions surrounding major population centers have kept millions of outdoor grills in dry-dock.

Even before the seasonal warming trend was hijacked by La Nina, we knew that the market would require an extraordinary buying effort by second-quarter carnivores to handle historically high retail prices. This challenge was significantly compounded given the rocketing price of gas (up 88 cents since the first of the year).

In other words, you can stack insult on injury only so high.

Both beef and pork wholesale prices are really struggling despite recent attempts to artificially limit production. It would be whistling in the dark to suggest that balmy temps would cure the slumping meat trade faster than you can say "lighter fluid." Still, they might generally boost market potential -- if only the six- to 10-day forecast window offered a ray of hope.

The final barb of the usually helpful spring could be a ticking bomb. Between corn planting delays, germination problems and the risk of reduced acreage, the future price of feed could shift from borderline impossible to crazy.

Livestock producers desperately need farmers to grow and harvest a bumper corn crop. While row-croppers can still get the job done over the next six months, this spring of so many other discontents has also increased their chances of failure.

Impact of exchange rates on import/export

Just a quick thought, what impact does a rising exchange rate have on the import/export potential for a country?  For example, CAD has been appreciating against the USD for some time and if the Bank of Canada is unable to derail this appreciation, what impact does it have on Canadian exports? 

For example nearly 76% of Canadian exports as of 2008 go to the US, a rise in the CAD/USD exchange rate makes those exports more expensive decreasing demand.  This while only 63% of Canadian imports come from the US as of 2008, meaning while imports get cheaper, demand many not increase due to lack of exports and their trade surplus would decrease.

The next question to answer would be what impact this has on the CAD and Canadian markets long term?  Further, how will Canadian exporters perform over coming months if appreciation continues.

The impact of loop eddys on hurricanes in the Gulf

One of the things I've taken interest in this summer is the tracking of hurricanes in the gulf and their resultant impact on oil prices.  From this I've gained a better understanding of hurricane development and forecasting through the regular reading of hurricane expert Dr. Jeff Masters' blog over at weather underground.

One of the things he covered that proved very interesting for hurricane Gustav was the impact loop eddys have on hurricanes passing through the Gulf of Mexico.   Loop eddys are basically pools of warm water in the Gulf of Mexico created out of the current of water that flows from between Cuba and the Yucatan peninsula through a portion of the Gulf of Mexico before exiting through the Florida Straits.  More info can be found here.

Loop eddys can be important for hurricane forecasting as they can fuel a rapid and sometimes unexpected intensification of a hurricane such as occured with hurricane Katrina.

This knowledge has led me to wonder the impact loop eddys will have on hurricane Ike, which is presently projected to enter into the Gulf sometime next week.

 

While noting the projected track of hurricane Ike, take a look at the forecast of water temperatures in the Gulf as available from data from the US Navy's Naval Oceanographic Office.

 

 

 

From this we can note that the present track of Ike will likely take it right over quite a large eddy in the Gulf.  Now, the larger questions are whether conditions will be favorable for hurricane development as it passes over, namely if there will be low wind shear and relatively moist air.

Interesting comments on Oil

An older article from back in May on Naked Capitalism points to the words of John Dizard of the Financial Times who has interesting remarks overall regarding oil prices.

Eugen Weinberg, a commodities specialist with Commerzbank, who thinks we are in the late stages of a bubble, says: "At the moment we have big inventories worldwide, about 3.5bn barrels in the OECD countries, which does not include China. That is enough so that if Saudi Arabia stopped exporting, the world could run at its present level of demand for a year and a half with no increases in production from other countries."

This led me to look into other remarks by Mr. Weinburg out of interest, such as this Reuters article from June 11th.

Oil should come back down to under $100 in 2009 but the days of $40 or $50 a barrel are long gone, senior commodity analyst Eugen Weinberg told journalists in Frankfurt.

"I think we are seeing an exaggeration in markets right now and the peak can possibly be reached in the next three months," Weinberg said, estimating a peak price of around $150-$170.

...

"The trigger for this extremely fast-growing bubble is above all the poor performance of other investment classes, like stocks, bonds and property," Weinberg said, with investors turning to oil for returns.

By contrast, the chief executive of the world's largest energy company, Alexey Miller, the head of the Kremlin-owned gas giant Gazprom, predicts Oil is set to reach $150 a barrel in this Belfast Telegraph article.

In a speech to the European Business Congress in Deauville, France, Mr Miller offered little prospect of relief. He warned that the world was experiencing a fundamental shift in energy prices that will end at a "radically new level. We expect that the oil price will approach $250 per barrel in the foreseeable future".

...

Mr Miller's prediction is well beyond even the most heady market forecasts, the most extreme of which fall between $150 and $200 per barrel, and was explained only by vague references to demand from the developing world. It nonetheless stoked an already febrile atmosphere of growing public anger across Europe over a soaring fuel cost that is wreaking havoc at nearly every level of the economy.

That's interesting considering we just noted that some believe high commodity prices will cause demand in the developing world to sink.

Mr Miller placed some of the blame on financial speculators for oil's price rise – it has more than doubled in the past year – but said that the primary reason is simple supply and demand, driven by the rapidly expanding countries of the developing world, principally China and India.

Some interesting comments regarding growth in China

Just came across this post from NakedCaptialism, particularly some comments regarding growth in China and the impact that high commodities prices is having on it. 

 

- - -

 

Similarly, EconomPic argues (with charts) that:

Are commodities being driven up by Chinese demand or has China been powered by cheap commodities? The story goes as follows:

High growth in China increases the demand for commodities, such as oil
The increased demand increases the price of commodities
A spike in commodity prices hurts Chinese growth prospects
Slower growth decreases the price of commodities
Rinse, repeat…

More skepticism on the "China's growth as manifest destiny" comes from a story by Edward Chancellor in BreakingViews($, free trial):

Chinese export growth is set to fall sharply. Europeans initially took up the slack after the housing bust dented the appetite of American consumers for all things "Made in China." But the credit crunch is wreaking havoc on both sides of the Atlantic. Recent data suggest that European export demand is slowing. Many claim that Chinese domestic consumption will take up the slack. This is unrealistic. As Walker points out, the UK alone consumes more than China and India combined....

...

After falling for years, Chinese export prices to the US have started to climb. The combination of rising inflation and the revaluation of the RMB against the dollar means that China in some sectors is losing its position as the world's low-cost producer. Stratfor recently reported that the textile industry, which accounts for half of China's trade surplus, is under stress and clamouring for the reintroduction of export subsidies. As a result of rising costs, Chinese containerboard companies recently stopped shipping their products abroad, according to Fischer International. Newspaper reports relate that some American companies are moving their manufacturing from China back to the US.

The seesaw markets

When everyone is on the same side of the trade, the time is right for a reversal. - John Mauldin

Markets seem to work a lot like a seesaw.  Fair prices lie in the middle and everyone trading stands on one side or the other, looking to buy, or looking to sell.  Once one side gets to heavy, people start moving back to the other side in order to balance things out.  Being that the market is inefficient it is constantly balancing from one side to the other as people try to figure out what the fairest price is.

As John Mauldin points out in his recent letter, commodities may be reaching that point where too many people are on the buy side of the balancing act.  With the theory that institutional investors (companies that manage pension funds, etc) have run away from the equity (general stock) markets and sought safety in commodities (particularly futures markets where you can buy commodities for delivery in the future).  This, due to seemingly lax regulatory practices compared to other markets, has allowed a great many institutional investors to take a once balanced commodities market and weigh it down on one side of the equation.

Now, it does not take a genius to realize that commodities, over time, will become more in-demand as various economies around the world grow.  However, that does not guarantee that today's price, that balancing point, is a good one in comparison to prices in the near and distant future.  Not having many other options for where to throw their money, institutional investors run to commodities markets for safety, weighing down the buy side of the seesaw. 

The thing to note about the see-saw is that no one actually knows where the real balancing point is or whether they are on the better end of the deal.  Being that people generally have a habit of suffering from group think and following the consensus of others, when there is movement on one side of the seesaw, others will see it and often rush to that side to join in the momentum. 

This changing in momentum is where we see small and large bubbles develop in markets as well as their subsequent crashes as people too easily rush to overweigh one side rapidly driving prices up or down.  Once there are far too many people on the same side of the equation, the seesaw is lopsided and those most in the know start run to the other side changing the momentum in the other direction all over again.

The regulation John Mauldin points out in his letter regarding traditional markets control how much people can buy of any given market, thus slowing how rapidly that seesaw rocks from one side to the other.  The problem, as is quickly being recognized by regulators, is that futures markets have a loophole that allow investors to get around those controls and this loophole may soon be plugged.  Once such controls are in place, the market will not rock so violently, however, if we presently are heavily weighted on the buy side of the equation few can predict how regulators will change things and whether it will cause a rapid or gradual overbalancing on the market.

The question that lingers with commodities markets is whether they are now so heavily weighted to the buy side that a reversal can take place in the opposite direction.  Certainly somewhere out there is a fair price for those commodities but that price remains largely unknown.  Everyone stands on one side or the other, looking to buy or looking to sell, running back and forth trying to figure out if the side they're on is the right one.  The markets simply seesaw from one side to the next.

Why are oil prices spiking?

Is peak oil finally upon us?  Should we panic?  Perhaps not, as thanks to an excellent article by Thoughts from the Frontline's John Mauldin we can get an idea of why oil prices have spiked as of late and it has less to do with peak oil and more to do with questionable political moves and the potential rise of a new bubble.

In his recent piece "Whither the Price of Oil?" John discusses how institutional investment houses (pension funds, etc) have been dumping tons of money into commodity based exchange traded funds (ETFs) as a means of taking their money out of the Sub Prime havocked markets and placing them into something that will hedge against rising inflation.  The problem however, is that ETFs largely rely on future's markets to cover new investments and as such have pushed futures prices up drastically. 

Now, because many ETFs hold oil futures, this has purportedly caused a run up of the price in oil alongside other commodities .

Adding to this are political concerns with regards to interesting movements made by Iran.  John  mentions how Iran has been leasing out all of the oil tankers they can get their hands on and are storing their oil in them.  Indeed, the Calgary Herald confirms this by suggesting that the number of tankers Iran has leased has gone from 10 on May 2nd to 20 by May 22nd.  It also confirms John's suggestion that Iran may be in a bad spot as the bulk of Iran's oil is of low quality and can only be processed by specialized refiners, namely in India, China and the US. 

As the Times Online notes, the problem may not be so much that the price of oil has risen as the price of futures, the paper guarantees of oil for a month or more from now have risen out of control.

"consider the situation today in oil markets: the Gulf, according to Mr Rothman, is crammed with supertankers chartered by oil-producing governments to hold the inventories of oil they are pumping but cannot sell. That physical oil is in excess supply at today's prices does not mean that producers are somehow cheating by storing their oil in tankers or keeping it in the ground. All it suggests is that there are few buyers for physical oil cargoes at today's prices, but there are plenty of buyers for pieces of paper linked to the price of oil next month and next year. This situation is exactly analogous to the bubble in credit markets a year ago, where nobody wanted to buy sub-prime mortgage bonds, but there was plenty of demand for “financial derivatives” that allowed investors to bet on the future value of these bonds. "

However, on the flip side of the coin, could the political motive exist for Iran to attempt to disrupt oil prices?  What is interesting to note is that back in December Iran stopped accepting U.S. dollars in exchange for oil, which we can recall was a move made by Iraq back in the year 2000 that wasn't very well received.  Could this be a partial cause for why Iranian oil is less in demand today?  Of further interest is that in February Iran inaugurated the Iranian Oil Bourse, an exchange dedicated to encouraging trade of Oil in non-US currencies.  Both moves being very anti-American suggesting an potential interest to stir the pot.

The large question that arises from this is that why would Iran lease so many oil freighters?  Is it simply for storage of oil they are no longer able to easily sell or is it something more politically malicious such as trying to cause a disruption?  Certainly by leasing so many tankers and leaving them sitting the availability of tankers to ship oil decreases, forcing leasing costs to rise and can also cause a restriction in supply.  One could certainly wonder, what is Iran's plan in this regard?

Questions that arise with regards to oil prices are where will they go next?  If Iran continues to hoard tankers will that cause oil prices on the futures markets to continue to rise and if so, to what extent will it continue and what action will the U.S. take as a result?  If Iran dumps all their oil on the markets and frees up the tankers, could we be in for a crash in the price of oil?  On top of that we have the issue of the money thrown into ETFs by institutions and what eventual impact this will have on things to come and then there is the question of what impact the suggestion that Asian countries may cut oil subsidies will have on overall demand.  While there are a great many unknowns, one thing seems pretty clear, peak oil isn't here...  yet.

New Home Sales?

An interesting note.  The markets are up after the announcement of a 3.3% month over month increase in new home sales while missing the detail that there is really a 42% decline in year over year new home sales when comparing against April 2007 numbers. 

 

From the associated press:

Stocks advance after surprise gain in home sales

NEW YORK -

Wall Street advanced Tuesday after the government reported the first gain in new home sales in six months, news that raised hopes for a recovery in the housing sector and that offset disappointing consumer confidence data.

The Commerce Department said sales of new homes rose 3.3 percent in April to a seasonally adjusted rate of 526,000 units. In March, sales had fallen 11 percent to their weakest pace since 1991.

 

From The Big Picture:

New Home Sales Fall 42%

Sales of new one-family houses in April 2008 were at a seasonally adjusted annual rate of 526,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.

This is 3.3% (±11.7%)* above the revised March rate of 509,000, but is 42.0% (±8.1%) below the April 2007 estimate of 907,000.

 

Interesting charts:

courtesy of Barron's Econoday

 

Monthly new home sales (NSA - Not Seasonally Adjusted).

 

"Notice the Red columns for 2008. This is the lowest sales for April since the recession of '91. As the graph indicates, the spring selling season has never really started. "

courtesy of Calculated Risk

Import Genius

Import Genius is a really cool site worth noting for the future as it could offer implications for tracking trends in commodity shipments:

As described by the site:

"Within minutes of subscribing, you'll have access to lists of all of your competitor's suppliers and all of your supplier's customers in the United States."

Import Genius provides timely, detailed shipment data mined directly from the US Customs Automated Manifest System (AMS). Our user base is diverse: importers, exporters, entrepreneurs, freight forwarders, bankers, private investigators, foreign factories, and more.

More Rate News

Europe’s Next Rate Move May Be an Increase

Jan 10th, 2008 @ 2:30 PM|CARTER DOUGHERTY|NYT > Business

After the European Central Bank left its benchmark rate unchanged Thursday, the bank’s president suggested that its next interest rate move was most likely to be an increase.

Speaking at a press conference after the bank had left its benchmark rate unchanged at 4 percent, as had been widely expected, Jean-Claude Trichet, the bank’s president, said: “The governing council remains prepared to act pre-emptively so that second-round effects and upside risks to price stability over the medium term do not materialize.”

 

Fed Chief Signals Further Rate Cut

Jan 10th, 2008 @ 2:03 PM|MICHAEL M. GRYNBAUM|NYT > Business

Ben S. Bernanke sent a strong signal that the central bank will lower interest rates again this month as it attempts to stave off a recession.