Commodity Corner

Views on commodities and energy

Oil market gets a government

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The physical oil market, where traders exchange barrels of oil or financial instruments derived from them, is transacted not on a trading floor or electronic exchange, but by phone, instant messaging and – although employers have clamped down on it — the long liquid lunch.
Exactly, in other words, where regulators tend not to be looking. Instead, guidelines and indexes drawn up by the two main oil pricing agencies, Platts and Argus Media, serve as the de-facto rulebook for oil trading.
Argus announced a coup against Platts this week. The state oil company of top world exporter Saudi Arabia, Aramco, is switching to a crude benchmark index published by Argus to price its crude oil sales to the United States, from another benchmark published by Platts.
With a due sense of the gravity of its task, Argus issued a description of its index in a document labelled a white paper — a term typically reserved for drafts laws issued by the British government.

Dollar, weather to steer U.S. corn, soy prices

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iowa-corn-sept-3Veteran traders say U.S. grains feel “toppy” after last week’s rally to multimonth highs, but many remained hesitant to pick a direction for the coming week given the outside storms rattling the markets. What they would agree on is that the two main factors which have directed the markets for the past month — U.S. harvest weather and the dollar — will remain center stage this week.
    
Typically, Chicago Board of Trade corn and soybean prices slump during October, the traditional prime time for harvesting U.S. grains, as more supplies flood into country elevators, grain processors and other marketing channels. But Mother Nature has not cooperated this autumn. Persistent rains and cool temperatures have put the 2009 harvest off to the slowest start in more than two decades. 
    
Corn, the biggest row crop, was only 17 percent harvested on Oct. 18, versus the usual 46 percent. Soybeans were 30 percent harvested, versus the usual 72 percent. The delays increase the chances of quality problems for both jumbo crops this year, and boost costs for drying and grain handling. It also makes it tough for U.S. exporters to meet their sales commitments, especially in soybeans given the record sales for the start of the 2009/2010 marketing season. 
    
“This spring you couldn’t get the crop in and now you can’t get it out. So you’re seeing a lot of premium built into the market,” said Dax Wedemeyer, an analyst at brokerage U.S. Commodities in Iowa. “Everybody knows it’s wet — eventually it will dry out and you will be able to harvest this crop.” 
    
The question is when, analysts say. Forecasters on Monday are calling for more rain this week across the Midwest but it will be warmer and slightly drier than last week. So the U.S. Department of Agriculture’s harvest progress report at 2 p.m. EDT (1800 GMT) on Monday will keep the attention of traders. 
   
CBOT traders are guessing USDA would report the soy harvest about half done. Corn harvest was seen at only 25 percent as farmers focus on soybeans, which are seen as more vulnerable to damage from rain and cold temps. 
   
EYES ALSO ON THE WEAK DOLLAR 
“There is definitely macro money coming into grains because of the dollar,” said analyst Charlie Sernatinger with brokerage Fortis Clearing Americas. 
    
A weak dollar is a buy signal for dollar-based commodities, making U.S. grains more attractive to overseas buyers. Last week was a classic example. The Reuters-Jefferies CRB index <.CRB> of 19 commodity futures hit a one-year peak of 285 as the dollar fell to a 14-month low against a basket of key currencies. The dollar has been under pressure as the global growth outlook improves more than that of the battered U.S. economy and with financial markets anticipating record low U.S. interest rates staying in place well into next year. 
   
“The money that is flowing in here is not flowing in based on any kind of expectation of return. It’s flowing into commodities because of fear the basement of the currency,” Sernatinger said. “That makes it awfully difficult to predict — what the next flow is going to be.” 
    
Weekly commitments of trader data issued late on Friday by the U.S. regulator, the Commodity Futures Trading Commission, confirmed a big flow of speculative money into CBOT grains last week, traders and analysts noted. The end result was a surprise buoyancy in grains last week. CBOT corn for December delivery <CZ9> rose 7 percent to $3.97-3/4 a bushel for the week. Chicago December wheat <WZ9> climbed 10 percent to $5.47-3/4 and November soybeans <SX9> rose 3 percent to $10.06.
Photo: Iowa corn field taken in late September by Christine Stebbins.

from Adam Pasick:

Crunching the numbers on a vegan in a Hummer

Photo by Kris Krüg

(Updated below with Michael Pollan's response)

You want some petroleum with that Big Mac?

Journalist and food writer Michael Pollan broke down the hidden cost of America's best-known burger on Saturday to an eager audience at the Poptech conference. He traced the Big Mac's origins all the way back to the oil fields, used to make fertilizer that is crucial to the corn grown for cows in massive feeds lots.

“Our meat eating is one of the most important contributors we make to climate change," said Pollan, who is best known for his book "The Omnivore's Dilemma."

from Global Investing:

It’s the dollar

Two graphs (from Scott Barber) to remind that what you get from assets depends on the currency:

from Global Investing:

Investors break commodities link with equities

Investors smelling profits in commodities are using the sector as an early cycle play, alongside equities, because a lack of production capacity means higher prices sooner rather than later. 

Historically, prices of natural resources lag equities, which typically front run the economic cycle by between 18 to 24 months. The change is also partly due to the tumbling dollar, a major driver in recent weeks.

But will shareholders back hunger fight?

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The world needs to spend $83 billion a year to ensure it can produce enough food amid a changing climate for its growing population by 2050, the UN’s Food and Agriculture Organization estimates.
    
Rich countries have pledged more than $22 billion over three years to help small, impoverished farmers grow and sell more by investing in seeds, fertilizer, roads and marketing infrastructure.
    
GATES/Philanthropists have thrown their weight behind the goal. Bill Gates challenged research companies last week to make new technologies available to small farmers without charging them royalties. (Click on the link at the bottom to see his full speech to the World Food Prize forum.)

Corporations have said they see themselves as part of the fight too, particularly when it comes to research. But Robert Thompson, a former World Bank official, says he’s pessimistic the private sector will be able to contribute enough. “Their shareholders won’t stand for them solving all the problems of the developing countries, and giving it away,” he told Reuters.
    
Thompson“It’s going to take subsidies or at least a public sector contribution to engage their research horsepower,” said Thompson, now an agriculture professor with the University of Illinois, who has pushed for more spending on agricultural development for 40 years.
    
Agribusiness should be motivated to get involved in developing countries because they represent a future growth market for their products, Thompson said. “They should be willing to accept lower return on their own investments as an investment in the longer term, but we have to keep the short time horizon of the U.S. investment community in mind,” he said.
    
“Shareholders are brutal on companies that don’t meet their short-term profit expectations. In that sense, perhaps some of the European companies like Syngenta, BASF or Bayer … may have a little more license, if you will, to take a longer-term perspective than some of the U.S. publicly traded companies.”

from Summit Notebook:

U.S. Commerce Secretary doesn’t like ring of Shanghai Silicon Valley

U.S. Commerce Secretary Gary Locke says one thing he doesn't want to see is a Shanghai Silicon Valley develop from China's investment in clean energy.

He warned that if the United States doesn't move forward on clean energy, it risks falling behind China where the government is spending almost $100 billion a year to support renewable energy and clean energy efficiency.

Oil & Money — a relationship destined to endure

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The energy world gathered this week in London for the 30th annual edition of Oil and Money, a major industry event.***Some would say it is high time the conference had a title more in keeping with the prevailing political mood and the conference’s official colour — green.***But, for all the rising tide of rhetoric ahead of talks in Copenhagen in December to try to ensure a low-carbon future, high-carbon oil is still where a great deal of the money is.***If big business is shifting, the process is gradual and many have voiced scepticism about the chances of agreement in Copenhagen on how to follow up the Kyoto Protocol that expires in 2012.***Representatives of the Organization of the Petroleum Exporting Countries were particularly clear that the not-too-distant future was more black than green.***”There’s no getting away from fossil fuels,” Nigerian Oil Minister Rilwanu Lukman said on the sidelines of the industry conference.***”Biofuels will not work. You can’t use your food to have energy,” said OPEC Secretary General Abdullah al-Badri. He also ruled out nuclear power, which many in the energy industry regard as a low-carbon option.***”Nuclear energy is just waiting for a catastrophe,” was Badri’s view.***The heads of oil majors were more circumspect, but the message was not so very different.***Gas, they said, was very viable as a proven technology for power generation that emits far less carbon than coal, but it cannot meet the world’s massive transportation needs.  BP’s CEO Tony Hayward said the company worked on the assumption 80 percent of the world’s energy needs would be provided by fossil fuel as far out as 2030.***By that measure, we could be set for another 30 editions of Oil and Money.

from Summit Notebook:

Steven Chu: “I’m an energy efficiency nut”

He unplugged the extra refrigerator in the basement. He got a tankless water heater and reduced the heat setting. He turned down the air conditioning last summer and used fans to keep cool.

Yes, Energy Secretary Steven Chu acknowledged, "I'm an energy efficiency nut."

The Nobel physics laureate said he's slowly weatherizing his home in the Washington DC area, but "weatherizing" isn't a word he likes. "I'm decreasing its energy consumption and making money," was how he put it at a Reuters Washington Summit. Chu figures his energy bills are about half what the home's previous owners paid.

from MacroScope:

Will food prices rise?

The Becker-Posner Blog has an interesting debate posted on the question of  food shortages and their accompanying price rises. As usual, it is a to-and-fro between economist and Nobel laureate Gary Becker and his University of Chicago colleague Richard Posner, a U.S. appellate judge.

Becker reckons that some commodity prices will rise as the global economy recovers but that food is different.