Archive for the ‘commodity prices’ Category
Don’t do it folks.
There’s no “reflation” trade. Nor is this “manipulation.”
There is one thing to watch, and that is if the physical commodity at real, no-BS volume sources de-couples from the futures price. This is a nightmare scenario as it posits the imminent destruction of the capital market structure, since futures are allegedly deliverables.
That is, if I own a gold mine and know I can dig gold out of the ground for $1,200 an ounce “all-in” I will short whatever I’m sure I can deliver over the next year or two into the market so long as the price is over that amount, as it guarantees my profit.
I’m not interested as a miner in speculating on the price. I make my money digging the stuff out of the ground — doing real work and getting paid in real money. I am singularly uninterested in the speculative fervor or the “gold bug hard money” mania; it means nothing to me at all.
If this relationship changes then — and only then — do you get panicky. But then you get panicky about everything, because as soon as you lose the fungible nature of financial products with their underlying assets the market is telling you that the electronic representation of all such assets are about to be marked down dramatically and quite possiblyto zero.
Today, here and now, despite all the screaming from various people who are trying to fend off the margin clerk such claims are unsupported and thus utter crap.
Instead, what you’re being told today (and have been for a while, if you have been watching the charts, particularly for copper) is that central bank “money printing” doesn’t work. That is, all it has done is inflate financial asset prices. It has done nothing for the broader economy, which means that all they’ve done is blown another bubble!
You just heard a “pop.”
Ignore it at your own peril.
The weather conditions in the middle part of the country during the last couple of months have been highly unusual. The following is from a recent article in the Los Angeles Times….
It’s not that the Midwest hasn’t been extremely hot before, and it’s not that it hasn’t been incredibly dry.
But it’s unusual for a vast swath of the Midwest to be so very hot and so very dry for so very long — particularly this early in the summer.
The current heat wave — which is spurring comparisons to the catastrophic heat of 1936 – is “out of whack,” meteorologist Jim Keeney said Friday in an interview with the Los Angeles Times.
Corn crops typically pollinate and mature in June and early July. That is why this time of the year is so vitally important for corn. We have reached a make it or break it moment.
The following is how an Accuweather.com report described what is happening right now….
Either heat or drought can stress the stalks, but both can basically shut down the pollination process. When this happens few, small or no ears of corn form.
According to AccuWeather.com Agricultural Meteorologists, you can’t raise a corn crop with less than an inch of rain over six weeks, combined with 100-degree and higher temperatures. However, these conditions have taken place in much of the southern corn belt through the week of July 4, 2012.
If pollination does not happen, corn farmers might as well give up.
Just check out what agricultural economist Chris Hurt said the other day….
“Pollination problems just can’t be overcome, even if the weather turns. There’s no turning back. There’s just failure.”
At this point, half of all corn in the state of Indiana is already in poor shape.
With each passing day, the condition of the corn gets even worse.
As a recent article in the Chicago Tribune detailed, many farmers feel completely helpless at the moment….
Dave Kestel, who farms about 1,300 acres in Manhattan about 40 miles southwest of Chicago, said he feels helpless.
“Every day you get out there and it’s the same heat and cloudless sky,” he said. “You see your corn just withering out there, knowing you can’t do anything about it.”
The United States is suffering from a severe lack of rain. Just look at the chart posted below. According to the U.S. Drought Monitor, most of the country is experiencing drought conditions right now….
These drought conditions have also played a major role in the huge number of wildfires that we have seen lately.
There are a few northern states that are not feeling the drought right now, but otherwise the rest of the country is extremely dry.
So what does all of this mean for you and I?
A recent article by Holly Deyo summarized why we should all be praying for rain….
Since 75% of grocery store products use corn as a key ingredient, expect food prices to skyrocket. Corn is also a staple in many fast foods. Corn is in ethanol and the main food source or chickens. In addition to this, maize is in many things that aren’t obvious like adhesives, aluminum, aspirin, clothing starch, cosmetics, cough syrup, dry cell batteries, envelopes, fiberglass insulation, gelatin capsules, ink, insecticides, paint, penicillin, powders, rugs and carpets, stamps, talcum, toothpaste, wallpaper, and vitamins. That’s just for starters…
This is a huge heads up for you to purchase corn-using products NOW before these conditions reflect in grocery goods. It will be a narrow window of opportunity.
These thoughts are being echoed by many agricultural economists as well. According toBusinessweek, the outlook for U.S. food prices is bleak….
“When people look at rising prices for hamburger, butter, eggs and other protein sources from higher corn costs, that’s when more money ends up in the food basket,” said Minneapolis- based Michael Swanson, a senior agricultural economist at Wells Fargo & Co., the biggest U.S. farm lender. “We were hoping for a break, and we aren’t going to get it.”
Unfortunately, the fact that the corn is dying all over America is not just a problem for the United States.
As Businessweek also recently noted, the fate of U.S. corn affects the entire globe….
When rain doesn’t fall in Iowa, it’s not just Des Moines that starts fretting. Food buyers from Addis Ababa to Beijing all are touched by the fate of the corn crop in the U.S., the world’s breadbasket in an era when crop shortages mean riots.
This year they have reason to be concerned. Stockpiles of corn in the U.S. tumbled 48 percent between March and June, the biggest drop since 1996, the U.S. Department of Agriculture said last week. And that was before drought hit the Midwest.
The United States is the world’s biggest exporter of corn by far, and if there is a massive corn crop failure in America it is going to be felt to the four corners of the earth.
Just check out what Abdolreza Abbassian, a senior economist with the U.N. Food & Agriculture Organization, said the other day….
“Everyone watches the U.S. because they can rely on it. Without it, the world would starve.”
Back in February, I wrote an article that suggested that we could see dust bowl conditions return to the middle part of this country in the years ahead.
A lot of people were skeptical of that article.
Not quite as many people are skeptical today.
The following is from a recent article posted on MSNBC entitled “Fears of new Dust Bowl as heat, drought shrivel corn in Midwest“….
Crop insurance agents and agricultural economists are watching closely, a few comparing the situation with the devastating drought of 1988, when corn yields shriveled significantly, while some farmers have begun alluding, unhappily, to the Dust Bowl of the 1930s. Far more is at stake in the coming pivotal days: with the brief, delicate phase of pollination imminent in many states, miles and miles of corn will rise or fall on whether rain soon appears and temperatures moderate.
As I wrote about last week, if the weather does not turn around soon the implications are going to be staggering.
Even if we got some significant rainfall at this point a tremendous amount of damage has already been done according to the Washington Post….
Jay Armstrong, owner and operator of Armstong Farms in Kansas, flew his small plane over a portion of the affected area and landed with the impression that the potential damage is far worse than is commonly understood.
“At this time of year, when you look down in a place like Indiana or Illinois, you should see just lush green fields,” Armstrong said. “I saw bare soil. I just thought to myself, the market has no idea what’s coming.”
So is there significant rain in the forecast?
Unfortunately, the answer is no.
The National Weather Service says that the corn belt will experience “above-normal temperatures” and “below-normal rainfall” over the next week.
At this point it does not look like there will be any significant rainfall for the foreseeable future….
“We got a break in the temperatures over the weekend but no rain of significance is in sight for next seven days,” said Jim Keeney, a meteorologist for the National Weather Service the US central region based in Kansas City, Missouri.
Needless to say, that is really bad news.
Right now we just have more heat and more dryness to look forward to. The skies are like iron and the earth is like brass. We like to think that we have conquered nature, but at moments such as these we see that is not true at all.
A couple of weeks ago I wrote an article about all of the reasons why we should be concerned aboutthe second half of 2012. In that article I did not even mention drought and crop failures. Sometimes major problems have a way of piling on top of themselves.
The U.S. economy is already in bad enough shape without adding major crop failures to the mix. This is something that we just don’t need right now.
But it looks like we are going to have to deal with it. Unless there is a major change in the weather, food prices are going to go up even more and large numbers of farmers and ranchers are going to be absolutely devastated.
Let us all pray for rain. We desperately need it.
Such has been the siren song for the last few months on commodities in general.
Despite my repeated warnings that markets aren’t that simple, and that it has all been leverage – that is, cheap debt – that has powered them higher, nobody wanted to hear it. “Gold is money.” “Silver is money.”
So are you going to tell me, my friends, that there has been an inflation and then deflation of roughly 20% – on the upward side in the last month or so, and on the downside in the last couple of days?
Gold is getting hit pretty good too:
Then, of course, there’s oil.
How about “Dr. Copper”? What’s he saying about the economy?
“Cheap money” – that is, unlimited leverage – will drive markets higher. For a while. It creates speculative manias. It creates the feeling of wealth. It creates a “high”, much like an addictive drug.
But it is not wealth. It is not prosperity. And it is not sustainable.
The real economy, on the other hand, continues to suck. Gas prices have reached the point of demand destruction. It’s $3.96 for regular here today, although I’m sure with oil off $9 it’ll come in over the next few days.
GDP was soft as well. And the jobless claims numbers today? Horrible. Then there’s all the “great news” over in Europe – Ireland, Greece, German production number misses and Trichet claiming “We have this guys. Really, we have this.” Uh huh.
Are markets going higher? Based on what? Expectations on a forward basis and general bullishness are ridiculously high. Profit projections are for $100 on the SPX for the year. Really? With all the input cost pressures already in the cake and unable to come back out for six to nine months?
This was exactly what I was warning about last August when this pattern began to be evident – that those who chased and continued to pile in would eventually get their heads cut off.
Sure, if you just bought with cash back then you’re doing fine. But far too many people did not. They kept adding off their paper “profits” – margin debt is at extremely high levels, as people piled in more and more as prices rose.
Well, now there’s a problem and it’s especially bad if you’re in a levered instrument such as the futures markets.
You buy a contract that controls $50,000 of the underlying with a margin of $5,000. The contract’s value goes up 10%. You now have a 100% profit against your margin. You take that and buy another contract.
What happens if the price goes back to the original level? You’re in trouble, that’s what.
Not only is your original $5,000 margin “profit” gone but so is another $5,000, even though price just round-tripped up and then down! That is, you’re now broke as your entire original stake has evaporated into the ether, even though prices are right back to where they were.
If you think this isn’t common, you’re very wrong. It is. Traders blow up in this fashion all the time. It’s idiotic, but it happens on virtually every prolonged move where leverage becomes the gist of the action. It happened to real estate speculators during the real estate bubble, it happened to tech speculators during the 1990s and now it’s happening again.
Might this “stop” at some point before the market really unwinds? It might. But there’s no guarantee that it will. In fact, there’s plenty of reason to believe it won’t – that margin calls will in fact beget more margin calls.
In 2008, these sorts of margin-unwind trades are what fostered the instability that ultimately blew up in everyone’s face. The systemic imbalances in the system are worse now than they were in early 2008, and the policy response available to attempt to stop a collapse are nearly all spent.
Go ahead folks, buy the dip. It’s been a good trade for the last year or so, especially from August onward.
Just be aware that you’re buying into a margin liquidation, and if the “Cheap Money” disappears, you’re going to be dealing with a lot of sleepless nights.
The Federal Reserve’s “highly accommodative” monetary policy is partly to blame for rapidly increasing global commodity prices, said Kansas City Fed President Thomas Hoenig, who called on colleagues to raise the benchmark interest rate toward 1 percent soon.
And what did I post a good long while back?
That was the second version, and now that Hoenig has admitted it, well…..
Where are the handcuffs for BendOverBernanke? It’s a crime to lie to Congress!
A couple of revealing charts from the Fed’s Flow of Funds data. Both show net flows into Treasuries by creditor type and the Federal Government’s borrowing during each quarter. Note, the quarterly data is annualized.
The first chart illustrates how QE2 flushed domestics out of Treasuries and effectively funded 63 percent of the budget deficit in Q4. The Treasury is prohibited from directly selling bonds to the central bank, but effectively finances the government through POMO.
Given that a large portion of the Rest of World category are central banks recycling BOP surpluses, it’s likely that 90 percent of the U.S. budget deficit in Q4 was funded by central banks. You think this may have anything to do with what’s happening in the commodity markets? That is, the central banks’ printing presses providing the fuel for speculators?
Furthermore, we ask: who is going to finance the U.S. budget deficit when QE2 ends, especially at a sub 3.50 percent 10-year Treasury rate? Bill Gross knows!
(click here if charts are not observable)
The media is finally waking up. Along with Fox News’s Larry Kudlow, now Dylan Ratigan of MSNBC sees the clear correlation between the Federal Reserve (with permission from Congress) devaluating the US dollar (QE I, II and lordknowshowmanymore) and the skyrocketing prices of essential commodities for the rest of the world. The simple fact is that commodities are priced in US dollars. If the dollar is going down in value, it takes more of these other countries’ currency to purchase them. All countries other than the US must first exchange their own currency for US dollars before purchasing needed commodities like wheat, beans, rice and sugar. This makes essential food impossible for them to afford.
Egypt used to produce nearly all the wheat it needed to sustain its people – but now, it imports almost all of its wheat supply. In the past year, Egypt has experienced a 47% increase in the price of its wheat. For people making only $2.00/day on average, exactly how long is it before many starve? This situation is playing out across the globe. Starving people do desperate things.
Now when you turn on the news and you watch the violence breaking out all over the world, you’ll know who to blame. While you’re at it, realize that the other pertinent fact here is that all this US dollar devaluation is for one reason and one reason only: to hide the insolvency of the major US banks. These are the very same banks commiting massive fraud against millions of homeowners across the country. The very same banks that Congress forced you to support with your taxpayer money.
The banks, Congress and this Administration is desperately hoping you don’t figure this out. Our government is now completely devoid of any morality or ethics. Are you?
The Cycle of Corruption