Commodity Corner

Views on commodities and energy

VOLATILITY DUE IN GRAINS — CHOPPY BUT HIGHER?

  Volatility is the only sure thing Chicago grain traders can count on for the week starting Jan. 21 (when Chicago Board of Trade screen trading opens on Monday night, not Sunday, due to the Martin Luther King national holiday on Monday). The dismal U.S. economic outlook given the spreading credit crunch and recession fears has sent US stock markets off to the worst start of any year ever, weighing on speculative sentiment. CBOT grains, traders say, also look technically overbought, a factor that weighed in with profit-taking sales in the markets toward the end of the last week.     The exception to this was the wheat market led by Minneapolis — rising to an all-time high of $11.94-3/4 on Friday, up the 30-cent limit – given the scarcity of high-protein wheat and soaring cash markets. 

    The general feeling on Friday among Chicago grain traders was that corn, soybeans and wheat seem to be in a mild correction phase after the run to record highs since the first of the year. But the air of euphoria among grain bulls won’t go away. The US energy bill in December dictated an ever-rising demand for corn acres for ethanol for years to come. Spring wheat’s rally was just another bullish reminder of the war over planted acreage which will be a highlight of US grain markets in 2008. Lastly, with Wall Street stocks in freefall, the flow of hot money into commodities like oil, gold and grains looks set to continue. 

  A sideshow to keep an eye on: the wrenching pain of grain hedgers. Grain buyers are the natural shorts in the market, taking on short futures positions to offset long cash positions. But soaring CBOT futures have caused an unrelenting squeeze as these elevators, merchandisers and processors face skyrocketing margin calls. Many have used exchange for physicals and other cash exchanges to exit their futures hedges, adding stress on their counter parties, usually bigger grain firms. The National Grain Feed Association is up in arms, complaining to the CBOT about inflated prices. Banks are getting skittish about lending money for margin calls on the short hedges they themselves demand of customers. Welcome to the brave new chaotic world of grain risk management.

    Another sideshow: the heightened volatility in CBOT markets has also fed talk that CBOT may expand daily price limits for grains and oilseeds. That is making the 11,000 U.S. country elevators even more nervous with a nightmare vision of margin calls doubling or tripling in the current bullish environment. The CBOT is now surveying elevators, major grain firms like Cargill, ADM and Bunge, and other CBOT customers such as Goldman Sachs on whether grain market price limits should be expanded or even removed. Stay tuned.

Drivers may face ethanol decision at pump

fuel1.jpgFor U.S. drivers, motoring has always been about freedom. Now some folks are saying pumps that offer drivers whatever blend of ethanol they like mixed into motor fuel will increase demand for the biofuel. 

“The future for the entire country is going to be blender pumps. And that will give the consumer the option to put the blend of ethanol they’d like into their car,” Jeff Broin, the CEO of private ethanol company POET said at the Reuters Global Agriculture and Biofuel Summit this week.

It’s the economy, stupid.

$100 a barrel didn’t last long.

After skyrocketing to the all-time peak earlier this month, oil prices have dropped 10 percent to a slightly more managable $90 a barrel — and the world’s energy brainiacs are a bit conflicted over whether this multi-year rally is over.

 Why? To borrow from James Carville, it’s the economy, stupid.

A housing crisis and a credit crunch (not to mention the high price of gasoline at the pump) are showing signs of dragging down U.S. growth. Some economists are predicting a recession. Such a slowdown in the world’s biggest energy consumer has the potential to slow fuel consumption, analysts say – crimping trucking, travel, and manufacturing — and could also threaten the runaway growth in energy demand from developing nations like China. Meanwhile, auto companies are busy designing smaller, more efficient cars in a rush to fuel economy not seen since the 70s.

Poking a little fun at the Green Gold movement

A modest proposal from UBS, exquisitely timed for gold’s first foray over $900 an ounce: outlaw gold mining altogether … That was the investment bank’s shrug to a Reuters’ article about a movement to make gold more ethical. One aim is to get gold the Fairtrade Foundation stamp of approval.  This means no exploitation of miners, no more earth rape or toxic chemicals and of course more recycling.  As the satirists at UBS point out, nearly all the gold ever produced is still around somewhere, in vaults,  jewelry boxes, museums and under mattresses.  Fairtrade labelling has been a marketing boon for coffee, cocoa and other goods that have gotten on the green bandwagon. So why not gold? In fact, why stop at Fairtrade?

“Why not go further?” UBS asked “There is plenty of gold in the world as it rarely gets destroyed and can be very efficiently re-cycled. Why not outlaw gold mining as an unnecessary waste of the planet’s resources. Of course this would push the price of gold up, but with 20 years newly mined supply sitting in vaults around the world, there can be no argument for any need to mine gold.”  

Grain traders on CBOT rally: “Don’t stand in front of the train”

After a record-setting 2007, Chicago Board of Trade grain traders had no chance to catch their breath in the first week of 2008. Last week soybeans and soyoil soared to new all-time highs — over $13 a bushel and 52 cents a lb, respectively — while corn jumped to an 11-year high and wheat continued hovering near all-time highs and jumped the 30-cent limit on some days. Veteran CBOT floor traders ask themselves: what next?Traders cited factors affecting the booming grains market: crude oil at $100 a barrel, throwing fuel on the already raging biofuels fire; corn stealing acres from soy, wheat and other crops; the dollar looking even weaker, feeding exports and draining US grain stocks; shaken Wall Street investors flooding into commodities; vague fears of climate shifts feeding crop disasters and magnifying weather scares. What next, you ask? They had one answer: more of the same.

For the upcoming week starting Sunday Jan 6 CBOT grain traders spotlighted factors on their watch list:

Galloping out of the gates in 2008

The year just past was thcommods2007.jpge perhaps the biggest for commodity investors in decades. Indexes comprising energy, metals and agricultural commodities ended the year up almost 30 percent on average, an embarassment of riches compared to the paltry rewards in the global stock and bond markets.

Will the commodities craze continue in 2008? Gold, silver, crude, heating oil, copper, wheat, soybeans, orange juice and cocoa prices are soaring on the first trading day of the year, so the signs are auspicious.

Biofuels and auto efficiency: U.S. set to adopt new energy legislation

President George W. Bush will sign into law an energy bill this week that will boost fuel efficiency of U.S. cars and trucks for the first time since 1975, and require a huge increase in the use of biofuels like ethanol.

The move comes in a year oil prices struck an all-time high near $100 a barrel amid concern that demand is rising more quickly than supply.

All Bulled Up

It truly appears that there’s not a bear anywhere to be found in the Chicago Board of Trade commodity markets. As soon as the USDA on Tuesday cut its estimates of how much corn, soybeans and wheat will be left at the end of the marketing year, Goldman Sachs turned around and raised its 2008 price forecasts for soybeans to $14.50 a bushel, corn to $5.30 and wheat to $7.50. Then the Senate approved on Thursday the energy bill that would require the production of 36 billion gallons of biofuels by 2022 — five times more than this year’s output.

    By Friday, Chicago Board of Trade wheat futures hit an all-time high of $9.81-3/4, soybeans rose to a 34-year top of over $11.60 and corn continues to trade over $4, far above its decade-long average of $2.40.

Green fields in red wheat

crb-wheat.gif

Wheat futures are making new ground above $9 a bushel in Chicago – track the rise in red in the chart above with the broader CRB commodities index in black. The rise in basic food ingredients like wheat isn’t making things any easier for central bankers trying to keep the credit markets from freezing up. Wheat prices are the stand-out example of “agflation”, Veronica Brown and Nigel Hunt reported here. Prices have more than doubled to record highs this year in the U.S. and Europe. Crop pressures, red-hot emerging market demand and the biofuels revolution are the drivers.

A rose is a rose is a farm bill

Gertrude Stein said “A rose is a rose is a rose,” … and in Washington, a $286 billion farFile photo of man at Republican Party congressional election rally in Grand Island, Nebraska, November 5, 2006. m bill is a $6 billion farm bill . They’re all the same thing, just like Stein’s roses. It’s a matter of bookkeeping and some pique.

Until this decade, farm bills were described by the amount of new spending they authorized, the yardstick used on most bills in Congress. The 2002 U.S. farm law was the first where the underlying spending — programs that are continued as part of the legislation — was lumped into the estimate.  It made the farm bill sound a lot bigger, somewhere around $200 billion instead of $51.7 billion in new spending.