Tim Hughes’s weekly newsletter, Dry Heat, summarizes the week’s latest activities and potential opportunities in the markets that he follows. His focus is primarily on the agricultural sector - cattle and grain futures. Contact Mr. Hughes at (602) 859-4100
The fight for or against a strike against Syria can be confusing. Many liberal politicos seem to want to hit Syria hard, while a number of conservatives are against it. What a difference a few years can make. Unequivocal belief of a government’s declaration is a leap of faith I will not make. Twisting the truth in the “National Interest” has become too commonplace. Regardless which side of the argument you take, there is an undeniable result of the dispute. Higher energy cost. The world uses about 100 million barrels of crude daily. Crude has jumped in price about $20 per barrel since the end of June. That figures to an additional $2 billion per day or $60 billion per month added to the world economy by way of higher energy costs. There are predictions that crude could jump as high as $150 per barrel if the conflict spreads to other areas of the Middle East. Fracking in Canada and the US is reaping benefits on the extra 2 million barrels per day they are producing. A new report on the economic effects of fracking in the U.S. shows even wider benefits than previously thought. Bloomberg states, “In 2012, the energy boom supported 2.1 million jobs, added almost $75 billion in federal and state revenues, contributed $283 billion to the gross domestic product and lifted household income by more than $1,200, according to the report released from IHS CERA.” Analysts are forecasting that this trend will continue and increase for at least another decade. On the other hand Libya, freed of Muammar Gaddafi, is a chaos of violent militias and its oil output has dropped from 1.6 million barrels per day to 150,000 barrels per day. Prior to the Libyan revolt, 85% of Libya’s oil exports went to Western Europe.
Cattle: The cash market this week was steady to nothing in the South and about $1 -$2 lower in the North at $123. Most believe there are adequate cattle for the next 2-3 weeks at least, but most also agree that numbers will drop toward the end of September. Beef demand has been slack because of warmer than normal weather. Packer margins are well in the black and I anticipate that there will be a scramble to acquire kill numbers before the anticipated decline actually begins. China supplanted the U.S. as the world’s biggest beef importer last fall. China and Hong Kong’s combined July beef and variety meat imports were 219 million pounds. U.S. beef shipments to Hong Kong are up 71% year to date but China remains closed to U.S. beef. That export market may soon open, now that the USDA has approved four Chinese poultry processors to initially begin shipping cooked poultry products from birds raised in the U.S. To put the export possibilities in perspective, Australian beef shipments to China are up 1,474% year to date. The Chinese middle class, 240 million out of a population of 1.3 billion, is forecast to rise to 680 million by 2022. Global beef supplies have been steady/lower over the past 6 years and the rise of China’s growing customer base will strain global supplies and higher beef prices. Herd rebuilding in the U.S., Canada and Mexico will contribute to the supply squeeze.
Hogs: The federal Committee on Foreign Investment in the United States (CFIUS) today blessed the acquisition of Smithfield Foods Inc. by China based Shuanghui International Holdings Ltd. CFIUS approval was important to the deal because the committee is charged with reviewing such international business deals to determine their effect, if any, on national security. The transaction is still subject to Smithfield’s shareholder approval and they are scheduled to vote on the transaction on 9/24/13.
Grain: I still feel that if the December corn contract stays below $4.70 and trades down to $4.25, someone who needs corn should be a buyer of at least 50% of his needs on a scale down. Technically, I believe the Dec corn will see a test of $4.35. Informa is estimating an average yield of 157.2 bu./ac and a total of 14.013 billion bushels. The estimates could well drop more by the time we reach some of the harder hit areas, but in the mean time there should be continued pressure on corn. If you need it, buy it when it gives you the opportunity and don’t worry about catching the low. There are a lot of shorts in the market and still a chance of a freeze.
Gold/Bonds: The gold market scares me because the bonds look so bearish. I don’t want to get to cute with the bond market, but it seems a bit oversold. I am on the sidelines on both markets, waiting for developments.
Questions? Ask Tim Hughes today at 602-859-4100
Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented is from sources believed to be reliable and all information is subject to change without notice.
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