Sometimes there are reasons for delays beyond the control of the participants. This is true of the release of the new commodity markets in WTC. We ran into unforeseen problems in Legal (backlog), Editing (backlog), MF Global Initial Margins and Lind integration. We have set the date for release for July 8th at 4:00p.m. Don't you hate that when it happens?
UPDATE: 02.29.2006
The Climate bill passed the house by a narrow margin with some strong arm support from Nancy Pelosi (you have got to love politics). This marks the end of the session for the Independence Day break, and then on to the Senate. Word on the street is that the bill will have a hard time in the senate, but I was surprised to see what appears to be an unpopular bit of legislation getting pushed through the house. We will continue to watch this bill which could shut down refineries in the US in favor of importing finished / refined fuels from foreign refineries.
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From a political standpoint, I would have to say many of us do, as the phone number to congress is playing an all circuits busy message today as the House looks to vote on the Energy Tax Legislation.
That phone number is 202-224-3121, good luck in sharing your opinion with your state congressman; you may want to try their individual offices.
From an economic standpoint, passage of this bill will kick it over to the senate, if it passes there, it is signed. The impact could be devastating to business.
Impact to the environment? Anyone’s guess. Big Oil says the bill would have them close US refineries and ship in the finished products. So the carbon from foreign refineries goes up where they have no such legislation, and it runs up the smoke stack into the atmosphere in an area with fewer clean air regulations, and it floats around the globe and lands on us anyway.
Cost goes up at the pump, in the stores, from our utilities. The cost never stops at a business; it is always passed to the consumer.
So how does this impact equity markets and commodities? This represents a major barrier to doing cost effective business in the US, I can only imagine that this will not be viewed favorably by the markets. Initially the USD could strengthen, but ultimately the inflation would cause interest rates to climb while restricting growth. So I will float the question without coming to a complete conclusion. I don't know, but I'm watching, I'm active (That's why I know you cannot get through on the number above), and I will report on this as we begin to measure the impact.
The LA Times reported last month that many ranchers are looking to become Mini Ranchers in an effort to reduce the old carbon footprint, and the cost of bringing beef to market. The television press has startted to pick up on this and report it now, so I thought I would make mention.
The smaller cattle reduce the cost of feed, they are easier to handle, and they provide as a percentage of total weight, more beef product with full size animals coming in at 45% and the mini cattle at 55%. Another example of less is more.
Here is an excerpt from the LA Times.
The headline overnight from Bloomberg is, "World Bank Cuts Forecast for Global Growth to 2.9% ", and the article goes on to say that smaller nations will really feel the impact. This set up nicely for selling in the equity markets today which has pulled the commodity currencies, the GBP and EUR lower while advancing the USD. JPY, and the CHF.
An exerpt from the article states, "The World Bank said the global recession this year will be deeper than it predicted in March and warned that a flight of capital from developing nations will swell the ranks of the poor and the unemployed.
The world economy will contract 2.9 percent, compared with a previous forecast of a 1.7 percent decline, the Washington- based lender said in a report today. Growth will be 2 percent next year, down from a 2.3 percent prediction, the bank said".
As equity investors make a flight to safety, we see the safe haven currency USD strengthen driving cvommodity prices lower this morning.
CHART OF THE DAY - WHEAT CONTRACTS as the strong USD should continue to put selling pressure on wheat.
Corn seems to have seen the top for the year in place. Seasonally, it should be turning down and may descend below the market low of 305 ‘4 set in November, 2008. Soybean Oil looks as if the advance for the year is done as well although China Soybean buying has been heavy this month. Soybean Meal is lagging behind Soybeans in the seasonal turn as planting numbers are in question and old crop supply is beginning to dwindle. A posted low below 1150 (July Soybean contract) would truly confirm the turn. Short Term and Mid Term Charts are strongly down already. We should have an answer Monday. As long as the Wheat harvest continues uninterrupted, there is no reason for concern with an aggressive bull market rally. Yields could be down for the year and could spark a cycle up from today’s low back to 630? Without proper export sales (India’s selling 650 metric tons on the market) there won’t be too much incentive for higher prices. The Commodity Research Bureau Index appears to be on the verge of topping and the decline could affect all commodity markets.
Part of what I've tasked myself with is to continue to understand the push me pull you relationship of the investment markets. Some things are easy for me to grasp, like the strength or weakness of the US Dollar in relation to commodity prices. Other things are taking me longer to get a handle on like the true drivers of Bond Yields. So as I'm working to learn more about;
Inflation Expectations - Increased inflation makes it more difficult to realize a positive return on Bond investments, so the yield is increased to lure investors.
Opportunity Cost - Stock investments earn faster than bonds, but if stock investments begin to significantly out pace bonds, then they will insist on a higher return or will exit the bond market.
Growth of U.S. and Global Economies - A booming economy diverts funds away from bond investments as financial and business institutions look for capitalization during growth for additional loans or investment capital for expansion. Less money for bonds means higher yield offered to lure investment.
US Federal Budget - Higher government spending equals a deficit which provides demand for debt investors and creates higher yields.
Decisions by the US Federal Reserve - If the Fed signals an intent to raise interest rates, the bond investor will insist on a greater return, thus running up the yield.
Liquidity in the markets - A loss of liquidity in the equity markets will cause investors to seek the liquidity of the bond markets, as liquidity returns to the equity markets, it siphons away from the bond markets.
So, I'm trying to get a handle on Bonds as they relate to other investments, and the one lesson that I've come away with today is a macro economic lesson. That lesson is that in order to get a bigger piece of the pie, someone else must get a smaller portion of the pie.
When Global Governments are competing for government bond investors it is a sweat deal for the investor, but the money placed in government bonds is now unavailable for corporate bonds further limiting a companies ability to finance growth.
This is a must read for anyone interested in the future direction of the United States dollar and its influence on commodity prices and foreign exchange rates.
Click here for Article
http://www.counterpunch.org/hudson06152009.html
Over the weekend the US Dollar rose as Russian Finance Minister Alexei Kudrin said Russia has confidence in the U.S. currency. Kudrin’s support for the dollar echoed that of Japanese Finance Minister Kaoru Yosano, who said last week that his government is confident in Treasuries.
Kudrin’s comments underscore the dependence of Brazil, China, Russia, and India on the currency of the U.S., the world’s largest economy and a $2.5 trillion export market. The four nations increased foreign reserves by more than $60 billion in May to limit their currencies’ gains and support their exports.
Excerpts are from an article on www.bloomberg.com , http://www.bloomberg.com/apps/news?pid=20601087&sid=aPeWQTo5w4fs
Calf to Cutlet
It probably doesn’t come as a surprise to the reader that the U.S. with its open ranges and supplies of water and grain is the largest producer of beef. Also the United States is one of the few countries that have a cattle industry that is separate from its dairy industry.
MEATS – Cattle production is meat production, and it divides nicely into two groups. The two broad groups are Cow-Calf and Feed Lots.
Cow-Calf operations are the breeding facilities, their business is the reproduction of cattle. Once the calf is weaned and weighs between 600 to 800 pounds it is shipped off to the Feed Lot operation.
Feed Lots are responsible for finishing out the animal for slaughter. This process of feeding the animal grains and protein runs from 90 to 300 days with an average of 140 days.
Once the desired weight and quality of grade is obtained, the animals are sent to the meat packers to provide the various cuts desired by the consumer.
SUPPLY & DEMAND – The Meat Packer responds to the consumers demand, as long as prices are perceived to be good value the demand continues. The Meat Packer orders up the finished cattle from the lots, and the lots bring in the weaned cattle from the Cow-Calf operations.
Feed Lots and Meat Packers can control the flow and output of their operations simply by increasing or limiting the inventory, but the Cow-Calf operation has a much longer lead time and is not as flexible in adjusting its operations.
For a Cow-Calf operation to increase production it must retain breeding stock which limits current supply to the markets, and increases the amount of time needed to draw profit from the herd reducing current cash flows.
The retained breeding stock will produce calves that would not arrive in the market until the following year. If the Cow-Calf operation wants to reduce production capacity it will sell a portion of the breeding stock to generate cash flow, but at a cost to future productivity which then requires a minimum of 2 and a half years to return to previous levels of productivity. Because of this lead time these operations tend to avoid liquidation of breeding stocks and maintain consistent herd sizes. The operation seeks a balance that will return maximum profits.
When demand is in place and profitability is high, the Cow-Calf operations retain more breeding stock to grow production, which in the short term reduces supply going to the feedlots, and in turn the supply processed by the packers to go to the consumer at market. This supports higher prices, which are passed to the consumer, until the consumer reduces consumption because they feel the price is restrictive.
As demand dwindles, the packers order less from the feed lots, and the lots order less from the Cow-Calf operation. They in turn reduce breeding stock which increases supply and drives down the price, and then the cycle starts over.
The fly in the ointment of this scenario is what we are experiencing now, and that is reduced purchase power with higher unemployment has many of us eating a little lower on the food chain. So the current economy, not increased prices has reduced demand. Prices are already low and the demand is not there. So will we see a reduction in breed animal production that limits supply in an effort to move the prices higher? If so, will livestock producers see the same thing that OPEC has seen with oil, and that is lower demand and higher prices, are not necessarily good for profitability when you have one basic product.
Content included in this post provided from an article originally published in Livestock Trader's Almanac and www.commodityseasonals.com
The new U.S. House of Representatives’ “Climate Bill” is estimated to potentially raise the price of unleaded gasoline 77 cents per gallon at the pump. American Petroleum Institute President Jack Gerard said the measure puts too much burden on the oil and gas sector. It would raise the cost of a gallon of jet fuel by up to 83 cents per gallon and diesel fuel by 88 cents, said Gerard, who heads the oil and gas industry’s main trade association in Washington.
The raise in consumer cost is based on the estimate in a Congressional Budget Office study. “The study confirms the bill discriminates against ordinary Americans who depend on cars, trucks, trains and airplanes,” Gerard said in a written statement today.
The legislation requires refiners and manufactures to buy carbon dioxide pollution allowances that can be traded on a market as part of an effort to cut emissions 17 percent below 2005 levels by 2020. The House Energy and Commerce Committee approved the bill May 21.
The CBO study published June 5 alleges the “measure” would produce $845.6 Billion in revenue and cost consumers $821.2 Billion through 2019 in the form of free allowances for industry, tax breaks for low income households and investment in cleaner forms of energy.
Massachusetts Representative Ed Markey, who helped write the bill, said via statement the action will “get our planet out of the red, while helping to put our budget back in black. It’s a “win-win for America’s economy and environment.”
It certainly sounds like it to me. It will produce all but $24.2 Billion of the “balancing the budget” revenue from consumers. Doesn’t the Constitution say there will be no discriminatory taxation?
