Graphic of Food Prices

Nice little interactive feature from Portfolio Magazine on the price increases for rice, wheat, corn and soy.

Interesting tid-bit, the UN's World Food Program budget is less than John Paulson's take home pay from 2007.

Source:
'Food Crisis', by Portfolio.com

More On Pickens

Found an posting on a Reuters global investment blog, which cited some research done by Birinyi Associates. Based on Birinyi's analysis you should believe what Pickens says. Below is a chart of the price of oil with data points of predictions by Pickens.

Here is the graph with a couple of data points:

1 Was surprised oil went down this much (19 month low) still thinks oil will average $70 in 2007.

8 Oil may surpass $100 on a geopolitical event and will rise to $80 within 6 months.

13 $100 oil will be routine.

17 Thinks oil wil rise to $150 by end of 2008.

Source:
'Pickens Sees Oil at $150...Here's a Look at His Track Record', by Eliis Mnynadu, Reuters News

There Goes Oil Again

Oil has broken the $129 range, with an intraday high of 129.60 (markets are still open at the time of this post). T Boone Pickens was on CNBC this morning saying that the oil producing countries are 'running out of oil'. He projected that oil will reach $150 dollars a barrel this year due to demand outstripping supply.

A couple of quotes from Pickens' interview with CNBC:

• "The Saudis claim they have more oil," Pickens told CNBC. "They don't. The President wasted his time to go to Saudi Arabia, to say, 'Give us more oil.' They can't give any more oil...they're stacking up the money as fast as they can stack it up."

• 'Eighty-five million barrels of oil a day is all the world can produce, and the demand is 87 million," he said. "It's just that simple. It doesn't have anything to do with the value of the dollar."

• "We are now paying out...an estimated $600 billion a year for oil," he said. "It's four times the cost of the Iraqi war, and not one of the politicians running for president has anything to say about it. I don't know whether they don't know it, or they don't want to mention it."

Source: WSJ.com

Most recently Goldman Sachs increased it's estimate for oil to $141 dollars a barrel from $107, again citing supply constraints. Deutsche Bank, Credit Suisse and Societe Generale have also raised the oil price estimates for 2008 and 2009 based on increased demand and limited supply.

The trend for oil appears to be onward and upward. My guess is that there will be a correction in the oil market when it hits $130 dollars a barrel as traders take profits. It will continue to rise during the summer due to the risk of a hurricane. The wild card in this is at what point will demand be reduced due to price of oil?

Source:
'Oil Rises to a Record After Pickens Says Prices May Reach $150' by Mark Shenk, Bloomberg News
'Pickens: Oil Going to $150, So Move to Gas', by CNBC.com

As Oil Goes, So Go The Transports

This makes no sense. Oil has been on a tear the past couple of weeks, rising greater than 20% over the past three months. As one would expect the Dow Jones Industrial Average has been kept on check due to the higher oil prices. It has risen only by 4% over the same 3-month time frame. The chart below shows the DJIA (in blue) compared to the Oil Service Sector Index (in orange). Yes, the Oil Service Sector does not track the price of oil exactly, but is a good proxy.

Source: WSJ.com

Below is a chart showing the DJIT(ransports) (in blue) compared to the Oil Service Sector Index (in orange). Over the 3-month period, the DJIT rose almost 10%.

Source: WSJ.com

Last time I check, the price of oil/gas is a huge expense for these companies. It would seem that the increase would weigh on their bottom line. Has something changed?

I guess not, last Friday FedEx lowered its 4th quarter earnings estimates due to increases in fuel costs. FedEx has been charging customers a surcharge for fuel related expenses, however Chief Financial Officer Alan B. Graf Jr said that these surcharges 'cannot keep pace in the short-term with rapidly rising fuel prices'.

Granted the transportation stocks have responded appropriately to the economic news over the past year, reaching a low of 3,995 back in January. However since that low, the index has risen by 28% to 5,159.

Seems like a good time for a correction in this index.

Source:
'FedEx cuts 4Q profit forecast, blames fuel costs', by Woody Baird, AP

The Spike That Popped The Oil Bubble

Goldman has come out with a research note stating that there could be a 'super-spike' in the price of oil. They are projecting that oil will jump in price to $200 a barrel within the next two years. This would be almost a 65% increase in the current price of approximately $120 a barrel.

The note says 'We believe the current energy crisis may be coming to a head, as a lack of adequate supply growth is becoming apparent.' 'The possibility of $150-$200 per barrel seems increasingly likely over the next 6-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty.'

Source: wsj.com

The report argues that due to the lack of adequate supply growth by oil companies and increased demand by non-OECD countries will lead to a continued increase in the price of oil. The report goes onto predicate that the price increases will lead to a reduction in demand for oil which will cause a strong correction. Goldman's research note states that the drivers for the increase are firmly in place; low OPEC spare production capacity, poor growth in non-OPEC oil production, restrictions on foreign investment in oil production and strong demand from the developing world.

Two years ago, Goldman was on of the first companies to indicate that oil prices could hit the $100 a barrel price range. Could they be right, again?

Below is a shot from a nice interactive feature from Portfolio magazine.

Source:
'"Super-spike" could lift oil to $200: Goldman', by Santosh Menon, Reuters News
'The World Oil Economy' , Portfolio.com

More on World Food Prices

Liz Ann Sonders has issued market commentary on world food prices. A couple of interesting points:

Americans Spending More on Food

'Most families in the United States can make adjustments around the rising cost of food (and gas) by simply cutting out other discretionary purchases. That being said, the discretionary portion of disposable personal income is at an all-time record low as the amount needed for nondiscretionary or essential items is at a record high, as you can see in the chart below.'

'So, we eat fewer carbohydrates, dine out less, and (perish the thought) drink less beer and liquor while forgoing other luxuries. But many people in developing countries have no such options, and the crisis means elevated risk of actual starvation.'

Most Americans would agree that they are spending more on food over the past year. As the amount of income used to purchase non-discretionary purchases it leaves a lot less available to buy all the other goodies Americans have bought in the past. If inflation continues, we will not be able to spend our way out of the recession, or whatever you want to call this current period.

Will this be the death of the American Consumer?

Some Countries Will Fair Better Than Others

'Of course, rising food inflation hurts some places more than others. The net sellers/producers, notably those with self-sufficient farmers, are the beneficiaries (i.e., Thailand is the world's largest exporter of rice); but those that are net buyers/importers are in dire straits (West Africa and Bangladesh are prime examples). The ability to respond to the crisis varies from region to region, as well.'

'(T)wo charts below, the first for stock markets in countries that are net beneficiaries (net producers) of food inflation, and the second for stock markets in countries where food comprises a larger share (at least one-third) of the consumption basket of the population. With China representing a significant weight in the MSCI Emerging Markets Index, it's no wonder the asset class has moved close to the bottom of the performance rankings so far in 2008.

Winners:

Losers:

Will food stuffs become the next great resource? Food has always played an important part in a country's/society's development. Once people were able to implement farming techniques, the population expanded and workers were able to specialize. Without framing, we would still be hunters and gathers living in caves.

At the rate food prices are heading, there might be a re-migration to the rural areas of America. Instead of kids escaping small towns, big city folk will head out to small towns to farm.

Will this usher in a period of a return to farming?

Here is an earlier post on world food prices and a post on commodities.

Source:
'Beast of Burden: A Global Food Crisis Erupts', by Liz Ann Sonders, Charles Schwab

Wealthy, Fat, Lazy...and 7-Star Hotels

This is what an massive inflow of petrodollars will do to a local population:

• If the oil price remains at about $100 a barrel, they will reap a cumulative windfall of almost $9 trillion by 2020;
• Almost a fifth of the UAE's native population suffers from diabetes;
• (A) McKinsey (study) reckons a quarter of native employees in Bahrain, Saudi Arabia and the UAE fail to show up for work;
• Burj al-Arab, the world's only seven-star hotel. Guests arrive by helicopter or Rolls-Royce, watch 42-inch plasma TV-screens in their rooms and choose from 13 pillows on which to lay their heads.

Another problem with all of the money coming into the Gulf region is inflation. The Saudis are dealing with an inflation rate of 8.7%, while Oman has an inflation rate 11.1%.

Most local currencies are pegged to the US dollar, which has dropped like a rock lately. This drop in dollars devalues there currency, requiring more local money to purchase goods not priced in dollars. The inflation rate is even hurting foreign workers who send money back to their home countries. Below is a great explanation on how inflation works:

'When an energy exporter converts its petrodollars at the central bank, domestic spending rises. But unless the local economy has a lot of slack, it cannot magically produce more goods and services to meet this fresh demand. Their price instead rises, relative to the price of things that can come in from overseas. According to a study by three IMF economists, a doubling of the oil price results eventually in a 50% rise in the price of non-tradable goods (such as housing), relative to tradables.'

This shows up as inflation. But the price rises should peter out once they have served two useful functions: diverting demand to goods from abroad, and increasing the supply of those goods and services that must be produced at home.'

Source:
'How to spend it', by The Economist

World Food Prices

There has been a lot of news coverage, and here, and here, on the increase in the prices for food stuffs across the world. Just this week Wal-Mart, Sam's Club and Costco have put limits in place on how many bags of rice people can buy. Granted the limit is between four to ten bags, but the stores have experienced a run on rice.

This chart compares the futures price of oil (in green) to the futures price of rice, which have moved together over the past three months.

Source: wsj.com

This chart compares the futures price of oil (in green) to the futures price of wheat, which moved together through mid-march but have diverged since then.

Source:wsj.com

The charts above are not meant to be a true technical analysis between these prices, its is just interesting to see them moving in relation to each other.

As the world's population increases, expect to see the prices of food stuffs become a real problematic issue. Some countries are limited in the amount of food that they can grow internally due to climate, governmental policies or state of modernization. How will these countries react when it becomes increasingly expensive to feed their population.

How will the world react? Will countries with a small surplus of crops be willing to export to other countries in need? Will there be an increase in civil unrest and war between countries? Most wars have been started in order to increase a countries access to natural resources.

What are the investment opportunities out there? There will an increased demand for farming equipment, fertilizer, pesticides and seeds. Any one of these, which improves the efficiency of growing crops will be able to charge a premium.

Additional Reading/Listening:
'Soaring World Food Prices', National Public Radio series
'The Silent Tsunami', Economist

Source:
'Rice Shortage Roils San Francisco Stores, Markets, Food Banks', by Ryan Flinn, Bloomberg News

Oil and Gas Prices - New Highs

Oil futures have hit a new all-time high, due to OPEC maintaining their production quota, an attack on an oil facility in Nigeria and an attack on a oil tanker in the Gulf of Aden. I am not sure that these events are really driving the oil market, per se. It seems that the market is looking for any reason to run oil higher. From a Bloomberg News story:

``The price seems to be rising inexorably towards $120,'' said Bill Farren-Price, director of energy at London-based Medley Global Advisors. ``OPEC has a very limited amount of spare capacity left and maybe they're trying to keep that in case there's actual physical disruption.''

Source: wsj.com

Granted oil supplies are limited and demand has/will increase due to growth in China and other countries, but it seems that oil and other commodities are getting ahead of themselves. As prices increase they will eventually reach a point that they will reduce demand and undercut their price support. Again from Bloomberg News, OPEC president Chakib Khlelil was quoted as saying the if OPEC nations increase their output, they 'will not find people to buy the increment.'

With the increase in oil prices, gasoline prices have also increased. For the week that ended on April 18th, a gallon of gas cost $3.4737, up 15.66 cents. Trilby Lundberg is quoted as saying, "(i)f crude oil prices do not retreat, then we will see somewhere between 10 cents to 30 cents rise in the retail price of gasoline, probably in the next few weeks,"

How much longer will the average US consumer be able to handle these price increases? What is left for them to cut back on?

Source:
'Oil Rises to $117 Record on Nigerian Supply Cuts, OPEC Stance' by Grant Smith, Bloomberg News
'Drivers paying record pump prices', by Chelsea Emery, Reuters News

Are Commodities The Next Bubble?

Over the weekend Barron's had an article on the boom in commodities markets and that it is probably about to suffer a correction. The article stated that most of the rise in the commodity markets are due to ETFs and Mutual Funds (MF) which are exempt from position limitations put in place by the CFTC (Commodity Futures Trading Commission). These limitations (for every long position there is a short position) are in place to protect the market from excessive speculation due to the limited size of the markets.

The ETF and MF money (every $9 out of $10) is not directly invested with the commodity exchanges, but with dealers that belonging to the International Swaps and Derivatives Association (ISDA). The dealers act as market makers for the commodity markets that the ETFs & MFs are investing in, by hedge the risk they have incurred back onto the commodity markets. What happens when all of the dumb money wants to sell their ETF or MF after the market drops 10-20%? There is too much leverage in the market to facilitate an orderly exit for all of these positions. Below is a chart providing a snap shot of the commodity markets and positions.

A Sucker's Bet

The Barron's article provides a nice little synopses of the issue:

'Here's the problem: The speculators' bullishness may be way overdone, in the process lifting prices far above fair value. If the speculators were to follow the commercial players -- the farmers, the food processors, the energy producers and others who trade daily in the physical commodities -- they'd be heading for the exits. For right now, the commercial players are betting on price declines more heavily than ever before...'

The ETFs & MF have taken almost 60% of the bullish (long) positions. Most commercial dealers have taken bearish (short) positions, betting against the continued rise in prices. These short positions are running almost 30% higher than the previous net-short record in March of 2004. The commercial dealers are the guys who have been in this business for a long time and have seen boom and bust cycles. It would make sense to watch what they are doing.

Everything I Know About Trading, I Learned From the Movies

How many times do you get to quote 'Trading Places' ?

Louis Winthorpe III: Think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high. Fear? That's the other guy's problem. Nothing you have ever experienced will prepare you for the absolute carnage you are about to witness. Super Bowl, World Series - they don't know what pressure is. In this building, it's either kill or be killed. You make no friends in the pits and you take no prisoners. One minute you're up half a million in soybeans and the next, boom, your kids don't go to college and they've repossessed your Bentley. Are you with me?

Billy Ray Valentine: Yeah, we got to kill the motherf... - we got to kill 'em!

Will It Last?

From Barron's, 'Index funds offer investors an easy, inexpensive way to gain exposure to a segment of the commodities markets or a broad-based basket of commodities. Result: The funds have drawn many private investors who have never ventured into futures, along with pension funds and other institutional players looking to diversify. But for all the virtues that the funds hold as a way of spreading bets across commodity markets, they take only long, or bullish, positions, avoiding short-selling. In other words, they trade on the naïve and potentially fatal assumption that commodities have the same tendency as stocks to rise over the long run.'

No and yes. In the short term think that the speculative money will run out at the first signs of trouble. The commodity market experienced a 5-10% drop in prices during the past two weeks, but has firmed up. Looking at the charts above, due to the drop in prices it looks like some of the speculative money has started to leave, or at least some have taken profits. Things that might cause the bubble to pop are:

• China / India - these countries have experienced a high rate of economic growth. Any slow down in this growth will affect commodity prices.
• Dollar - the dollar is at historic lows. Commodities are priced in dollars making it easier for other currencies to buy more of the commodities. If the dollar increases in value this discrepancy is negated.
• US - most consumers are spending on goods from China. If the US consumer starts to reduce their spending this will effect the demand for raw materials to make those goods.
• Lack of Buying - who is left to buy? Once there is a lack of buyers, the market will start to fall due to its own weight.

Long term commodities are a bullish bet. The earth's population is not getting any smaller and certain commodities are non-renewable. This sounds like a sweet spot for oil and natural gas companies. Also as more land is taken out of farm use due to urban/suburban development, whats left will become more valuable along with whatever it produces. Agribusiness sounds like a great thing to be involved in. In the words of Jim Rogers:

`If I told you how bullish I am about agriculture, you'd ask me to leave the room. Prices of agricultural commodities are going to explode. Inventories of food are the lowest they've been in over 40 years. The number of hectares devoted to wheat farming has been declining for over 30 years.'

Source:
'Commodities: Who's Behind the Boom?', by Gene Epstein, Barron's {$$$}
Rogers Says Sugar, Other Agricultural Commodities to `Explode', by Dave McCombs, Bloomberg News