Views on commodities and energy
CANCUN – Usually chummy executives were playing duck and cover at this year’s Latin American steel conference, as markets spiraled out of control and companies consider cuts in output to combat falling steel prices. Had the conference been held at the beginning of the year when steel prices were reaching record highs, it would have been another story. Today, instead of back-slapping and champagne glasses there are a lot of furrowed brows and pointed avoidance of journalists.
This reporter experienced a flurry of calls from otherwise friendly and enthusiastic PR people cancelling interviews that were arranged before the conference. Among the litany of reasons: “blackout period before earnings,” “times of uncertainty,” or simply “he didn’t show up.” Many of the top CEOs on the agenda decided to stay at home and work out their strategy in the face of falling world demand for steel amid a global recession.
At the opening cocktail reception, I overhead two company executives discussing the sighting of “one of those” from the AP – as if reporters were circling vultures, trying to pick the bones of the executives.
And chasing after CEOs as they slip behind closed doors, it was hard not to feel that way. When I was lucky enough to corner them, they joked about how they will only answer questions about the weather, or they just smiled and said nothing.
It sounds like a broken record but Chicago Board of Trade grain markets look set to ignore conditions in farm country and focused on Wall Street in the coming week.
Grain traders, like all financial market participants, are being affected by tighter credit, down-sizing by squeezed hedge funds and other big speculators, and worries about global demand for commodities being slammed by global recession.
Corn and soybeans finished Friday near one-year lows while wheat prices fell to the lowest in 16 months as stock markets around the world continued to plummet. It was just a few months ago when all three hit record highs as hot money flowed into grains and other commodities on an outlook for strong demand and tight stocks for raw materials from grains to metals.
Trader commitments data on Friday afternoon from the Commodity Futures Trading Commission showed large speculators finally turned net short in CBOT corn and soybeans in the week ending Tuesday, Oct. 21, after weeks of exiting long positions.
In CBOT wheat, big speculators further expanded their net short position.
It’s a global “margin call” — and global liquidation, as Rich Feltes, senior vice president and director of MF Global Research, described the recent market activity last week.
No one seems to care that the corn harvest of the world’s largest producer is running at least two weeks behind, a factor which usually supports prices in the autumn.
November is fast approaching and not even half the U.S. crop is out of the fields. Chicago traders estimate USDA will report in its weekly update on Monday afternoon that roughly 40 percent of U.S. corn is harvested, versus the seasonal average around 70 percent by late October.
But who cares when stock markets around the world continue to ratchet lower and erase trillions of dollars in paper wealth as fears spread. A credible solution to the world credit crisis continues to elude world leaders and, meanwhile, a flight to anything by U.S. Treasury securities and government-insured bank and money-market securities seems to still dominate.
On the NYSE, traders sighed in relief on Friday when the Dow Jones Industrial average closed only a little more than 300 points lower, recovering from an early 500-point drop. So all eyes among CBOT grain traders will be on what happens in Asian markets tonight.
If Wall’s Street fear index — the Chicago Board Options Exchange Volatility Index, is any indication, hold on tight.
The VIX <.VIX>, a leading indicator measuring the change in an S&P stock index price over a given period as a percentage, soared to a record high of 89.53 on Friday, sending more investors fleeing as far away from risk as they could get.
Grains didn’t escape the maelstrom.
Futures sank. But the most interesting indicator of the grain markets’ jangling nerves was seen by the spike in corn options volatility. CBOT December corn options volatility soared to 57 percent by the close, up 7 percentage points on the day. That compares average volatility of about 30 percent at this time of year when corn prices typically work to season lows as vast new supplies are harvested and move to elevators.
“You would expect vols to be up during the summer when crop yields are under question. It’s unheard-of to see these levels in the fall when we’re in the midst of harvest,” said one CBOT broker with numerous commercial grain firm accounts.
The last time he could remember volatility this high was in 1988 when the U.S. Corn Belt was threatened by drought losses.
So grain traders remain as distracted and unnerved by outside factors as all other U.S. and world markets. Add a fresh factor to the mix: news on Sunday afternoon in the Midwest that U.S. helicopters and commandos attacked a farm inside the Syrian border with Iraq on Sunday, killing eight civilians, according to Syria’s state television.
Another twig added to what seems a witches’ brew for the markets. It all adds up to one thing for grain markets starting on Sunday night: the roller coaster ride continues.
Political and financial leaders were working over the weekend around the world to find ways to calm the growing fears on Main Street and Wall Street as the burgeoning world credit crunch resists solutions. That cloud of doubts of necessity will hang over all financial markets, including grains and other commodities, in the coming week.
In Washington, President Bush met with G7 economic chiefs and officials from the IMF and World Bank. In Paris, European leaders hoped to agree on detailed plan on Sunday to prevent the spread of further panic. In Britain, banks were in crisis talks with the government and regulators which could see the government take multi-billion-pound stakes in several lenders. Australia and New Zealand announced they would guarantee bank deposits.
The deepening credit crunch has spawned fears feeding fears and wiped out trillions of dollars of paper wealth in stock and bond markets in recent weeks, creating a climate of worry that has dried up credit for many traders too. The Dow industrials fell for the eighth day in a row on Friday in its worst week ever, dropping below the 8,000 mark for the first time in 5-1/2 years.
The panic spilled over to commodities as the Reuters-Jeffferies CRB commodity index <.CRB> posted its sharpest weekly loss ever as selling in crude oil and other raw materials intensified. Plummeting grain prices added to the weight.
But in Chicago corn and soybean futures also got a double dose of bearish fundamental news on Friday. The U.S. Agriculture Department lowered its price forecast for grains in part because of the financial turmoil worldwide, which will weigh on exports and food purchasing power overseas. USDA also bumped up its estimates of the size of the 2008 American corn and soybean outputs.
USDA forecast a farm-gate price of $4.70 a bushel for the 2008 corn crop, down 80 cents from its forecast one month ago. Soybeans were forecast to average $10.35 a bushel, down $2, and wheat to average $7, down 25 cents.
Nearby Chicago Board of Trade corn futures closed just above $4 while soybeans finished around $9 after both markets dove by their respective trading limits (30 cents in corn and 70 cents in soy). Both are now near 12-month lows, as spot corn futures have been trading above $4 since December 2007 and spot soybeans have held above $9 for the past year.
Expanded limits go into effect beginning Sunday night for the start of trading in Asia: 45 cents in corn and $1.05 in soybeans.
All the bad news comes just as American farmers rev up for harvest across the heartland. Autumn weather has been ideal for harvesting. Warm days, little rain — giving late-planted crops time to ripen and reach their maximum yield potential, a factor USDA no doubt worked into its upward revisions for corn yields and production in last week’s monthly supply-demand update.
The coming week will offer plenty of volatility as the world tries to catch its breath in the worst financial crisis since the Great Depression.
PHOTO: Freshly harvested soybeans being unloaded in central Iowa farm field near Ames. USDA to release its next crop progress report Monday afternoon. Taken by Chris Stebbins.
Oil prices are slipping this morning, reacting more to dimming prospects for U.S. growth after a report showed job losses in August than the tropical storms building in the Caribbean.
October crude was last down close to $2 at $105.92 a barrel on the NY Merc — just about the level Iran’s OPEC governor said on Friday is “appropriate.”
John McCain’s crowd-pleasing chants of “drill here, drill now” and “drill baby, drill” seem like distant echoes of a quainter time — before the debacle on Wall Street.
America’s quarter-of-a century ban on offshore drilling officially ended Tuesday but the focus on expanding exploration and the concern over surging oil and other commodity prices are being swept away by the financial tsunami in the broader economy.
In a sign of the concern of a global slowdown, the DJ Iron & Steel Index has shed 15.6 percent in the past week. It is the worst-performing of the stock sector indexes tracked by DJ. (See the DJ sector indexes here). The coal stocks index is the second, followed by Industrial Metals & Mining. In fact, of the ten worst performing, only two are directly financial sector indexes and the rest are directly related to commodities, basic materials and transportation.
In the futures market, U.S. November crude settled down $10.52 to $96.37 a barrel, after touching a session low of $95.04 after lawmakers rejected the bailout package.
Gasoline shortages in North Carolina, Georgia, Tennessee, and parts of Florida in the wake of Hurricane Ike have driven some consumers to desperate measures as they hunt for places to fill up. People were cutting in long lines, fighting at gas stations, and hoarding gas in multiple containers, according to local news reports.
Hurricane Ike shut 15 refineries in the Gulf Coast’s refinery row and shut several pipelines as well. The outages have driven U.S. gasoline inventories to their lowest levels since 1967, and refinery utilization rates have sunk to their lowest rates on record.
The volatile and worsening U.S. financial crisis and the on-again, off-again plans for a $700 billion U.S. government rescue plan to free up credit from Wall Street to Main Street made Chicago grain markets a sideshow in the past week — but promised to continue to keep grain traders on tenterhooks Sunday night until a resolution is found.
CBOT electronic markets on Sunday night were like Asian markets and OTC markets around the world — waiting.
Lack of a credible agreement — and “credible” might remain a key debating point even after a deal was agreed — was sure to continue the black mood of all market speculators, worldwide, amid bank failures, frozen credit and a political witches’ cauldron a month ahead of a U.S. presidential election. On the other hand, agreement by the main opponents of the compromise — conservative Republican and Democrats facing the voters in a month — to bite the bullet and back a deal would likely boost a relief rally in equity and bond markets, as well as the dollar.
Scenarios abound about the bailout drama. If credit tightens with no bailout, trade finance would tighten too and the dollar fall. Would that be bullish grains as importers rush to book shipments? Or would spec money in all markets flee to safe harbors like T-bills and gold, weighing on grains and even oil.
Last week, the Chicago Board of Trade corn, soybean and wheat markets saw their share of volatility as investors and grain firms sat waiting for word from Washington. It was a low volume trading week as traders kept to the sidelines — too risky for most — with grain prices and open interest close to unchanged on the week.
“The uncertainty is creating big problems for everything,” Roy Huckabay, analyst with The Linn Group in Chicago, said on Friday.
“If they come up with a bailout package I don’t necessarily think it’s bullish commodities — it’s a matter whether it will calm people’s fears a little,” one CBOT trader said.
There’s also a lot of talk within the halls of Chicago trading firms and on the CBOT trading floor about the likelihood of month-end, quarter-end liquidation of portfolios that could occur on Monday and Tuesday, the trader added. “We will have to keep our eye on that.”
Then, after the month-end book adjustments, it’s the start of harvest across the Corn Belt, seasonally a bearish period for grain prices.
However — not unexpected in a season when traders have learned to expect the unexpected — speculators may come back in buying on weather fears: the upper Midwest could see its first killing frost of the season by Wednesday or Thursday morning, something that with this year’s lagging growth of the crops could spur spec demand.
But some Chicago traders also brushed off the threat, saying last week’s warm, dry weather was ideal for helping the delayed maturity of late-planted or flood-sogged corn and beans, helping crops to catch up and ripen and this reduce the potential of freeze damage. Weekly crop progress updates will be issued by USDA late on Monday afternoon, after markets close.
Another piece of information that traders will scrutinize comes on Tuesday, when USDA will report the amount of corn, soybeans and wheat held by farmers and commercial grain firms on Sept. 1. The numbers are key to grain traders and analysts after two years of huge drawdowns in grains due to global droughts, rising Asian demand and burgeoning biofuels use.
Dec gold settles up $6.50 at $8885.0 an ounce.
The ‘gold bugs’ are feeling vindicated by the markets in the past weeks. Gold Anti-Trust Action Committee’s Bill Murphy predicted this week that the Treasury-led bailout plan give a “staggering” boost to gold because it would feed inflation and hurt confidence in U.S. markets, Frank Tang reports.
T. Boone Pickens is pretty calm for a guy who lost more than a billion dollars.
The Texas energy tycoon has put his considerable wealth behind a renewable energy effort, saying he’s sick and tired of seeing America send all of its money overseas to pay for imported oil. But he’s also suffered a considerable loss on his energy investments: He “missed the turn.”
Read about it here and watch edited video below.