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Words defined to understand the following blog: Being “long” means you bought it or own it. Being short means you sold it or don’t own it.
Everyone watches oil and they feel the pain at the pump. There is not really a substitute for gasoline. If your car doesn’t have it, it doesn’t go. Pete Buttigieg and others said we should all go buy electric cars. Electric cars are expensive and even if we all could run out and buy a Tesla, you cannot get delivery until at least November. That is if they can source computer chips.
I just filled up my tank with diesel here in Nevada and paid $4.86/gallon. I filled it up because I think prices are going higher. That’s inflation and people’s sentiment often drives inflation until underlying data changes.
Buttigieg also has no concept of regular jobs in America. What if you are a contractor with a pickup truck? What if you get fill-in income driving for Uber, Lyft or deliver food for DoorDash or GrubHub? What if you are a salesperson that needs a minivan to haul samples? What if you are a house cleaner that needs a larger car or van to haul supplies and material so you can clean someone’s house? Are we all supposed to get BMW i3s, Chevy Volts, and Nissan Leafs? Buttigieg is not a serious person and is in over his head. He needs to go back to work at McKinsey.
Pro tip: If you want to be long commodities without actually buying commodities, buy an exchange stock that deals in commodities ($ICE, $CME).
To show you how extreme the move has been in oil here is a chart. It will trade over $150 is my guess. Yes, that is -$40/bbl in late April of 2020. We have a $166/bbl move so far on our hands.
Here are nickel futures. Russia supplies 12% of the world’s supply. Gee, I wonder why it has a spikey thing on the end?
The main market for Nickel futures trades at the London Metal Exchange. Don’t try to trade them, because they suspended trading. A Chinese company had a huge short and had to get out. That added a lot of pressure to a market that was already on its way to the moon. They are still sorting things out as I write this.
For what it is worth, nickel is an essential element in the battery of an electronic vehicle. The other is lithium. Most of that is mined in China although they found a huge deposit in Nevada. Of course, the Green movement wants the lithium in Nevada to stay in the ground yet they agree with Buttigieg that we all should be buying electric cars. Green people are out of touch with reality. When the wheel was invented in the Stone Age, they’d have kept dragging things around.
Nickel’s rally, and the reliance on Russia for supply is going to make electronic cars a lot more expensive. Stainless steel just got a lot more expensive too. How many things does stainless steel go into?
As an old dinosaur commodity trader, I checked out some of the hard-core ag markets to see what they have been doing. It will be no surprise to astute readers of this blog that the prices across the board are higher than they used to be. Principally, you can blame the level of government spending for that increase. Inflation happens when there are too many dollars chasing too few goods. The Fed printed dollars, and the Federal government helicoptered them into the pockets of Americans. That guaranteed inflation. Biden’s Build Back Better would increase the rate of inflation, not decrease it.
Two quick ways to decrease inflation are to increase interest rates and really drop the level of government spending. The second will work better than the first.
When you see moves like this in one market, you start to think about margin calls. Since futures are traded on margin, big moves force exchanges to increase the amount of money they want from traders to hold positions. That happens in rallies as well as breaks. I can recall being short hogs and watching the stock market meltdown in 2008. Because of the margin calls in stock futures, it carried over to agriculture futures. It didn’t matter what the underlying supply/demand fundamentals were, every market was going south because people were selling to raise cash for margin.
Here is wheat. Wheat is the main product of Ukraine. I know that Cargill, ADM, and the other big grain companies have huge operations there but I haven’t heard a peep from them. Being typically corporate, even after their ship got hit with a Russian missile, Cargill didn’t rock the boat (pun intended). Easier to close a McDonald’s than it is a farm operation.
Do you want beans in the teens? You got ‘em. Remember, animals like chickens and hogs eat soybeans as a major part of their diet. If you want to know how long you have until prices really start to jump, it takes roughly four to seven weeks to get chickens to slaughter. It’s seven to nine months for pigs.
I decided to check an alternative market. Potash is kind of a proxy for fertilizer. Nitrogen prices were already up 300% before the war. Here are potash futures. This will affect the price of crops this year. Your plant-based burger just got a lot more expensive. Russia is a huge producer of fertilizer. Planting season is right around the corner. Unless the warehouses are fully stocked, I doubt there will be a lot of fertilizer coming from Russia. That will affect golf courses and your front yard too.
I should point out that markets not only price in all current information into today’s price, but they influence future behavior. My friend James reminded me of that today.
It is easy to point out what happened. Charts do a good job of that. Charts can be a guide, but often are a poor predictor of the future. But, given what we know happened, what will happen with significantly higher prices?
If you took Economics 101, you might remember the concepts of elasticity and substitutes.
For example, the demand curve for gasoline, electricity, water, and goods like that are almost vertical. They are “inelastic”. No matter what price is posted, you will pay it because you need it. The diamond water paradox is a good primer to help you understand elasticity.
Your behavior will change when prices move. With the obscene cost of gas will you drive as much? Will you be a lot more efficient planning your trips when you hop in the car? Probably, because the price of gas is so damn high. If people drive less, demand drops. Airline rates go higher, people travel less.
The other thing that people will do is substitute. You cannot substitute for gas. But, instead of beef, you might eat more chicken. You will eat cheaper cuts of meat. You will make things that aren’t gone in one meal. That cheap roast will become a stew which will become a soup. Instead of buying one-offs, you might buy in bulk if you receive a discount. If coffee goes through the roof, you might switch to tea.
Here is a coffee futures chart by the way. Starbucks might see a decrease in demand. Coffee producers should be figuring out ways to grow more coffee. Tea producers should have a marketing campaign ready to get people to switch.
But wait, there is more. Price just doesn’t signal on the consumption side of the equation. It also signals on the production side as well.
If you are a farmer, and you see the price of soybeans is $17 a bushel when not that long ago it was under $10, what do you do?
A lot of cropland is in what is called, Conservation Reserve Program. CRP is a government program that pays farmers not to plant crops. It’s used for land that is not as tillable in general. Wildlife enthusiasts love the program because it benefits wild birds and species like that.
If I was a farmer, I might be sharpening my plow and planning on putting in more row crops, as long as I could get enough fertilizer. I’d do a lot of math to figure out what my margin will be given the new cost of fertilizer, seed, diesel for the tractor, and what I could sell my crop at. If it was more than I could get from CRP, I am planting fence post to fence post. That also assumes I can get the labor which has gotten significantly more expensive and scarce.
By the way, that jump in wages from $10 to $15 got eaten up by inflation.
One problem for producers is that often there are government regulations that get in the way. President Biden is full of shit when he says he is producing more oil. His first actions in the oval office cut off oil exploration. If he’s serious about bringing the pain to Russia and not American citizens, he’d lift that series of Executive orders immediately. We’d be drilling in Alaska. For your information, Alaskan oil production is at its lowest level in years even though prices have been rising. Gee, I wonder why?
Biden is a chicken and won’t take on the radical left-wing of his party. He’s killing the country by not doing it. What’s morbidly funny to me is Biden’s son Hunter was on the board of directors of a Ukrainian oil company. Ignore whether he was qualified or not. It’s clear he wasn’t. Why is a former Vice President who is supposed to be so “green” allowing his son to be on the board of directors of an oil company?
Maybe the Presidential limo should be electric.
I hear people say “markets are broken” or words to that effect when strange stuff happens. It’s just that they don’t understand it, can’t figure it out, or had things go against them when prior to the move all their internal logic told them something different.
Markets work. There are markets in everything. There are always costs and opportunity costs. People’s preferences create supply and demand curves. Markets are beautiful things. Even when huge price swings happen, that just creates opportunity. If Biden reversed his pedantic Executive orders for the American energy industry tomorrow and go back to the Trump policy, the price of crude would drop in response. That’s because expectations would radically change.
Markets are why the famous bet Julian Simon made worked out for him. Conveniently, the person he bet, Paul Erlich, with was a welcher and didn’t pay. Leftists are like that. They have an excuse for everything and blame someone else for their mistakes.
was a 1980
between business professor
Julian L. Simon
, betting on a mutually agreed-upon measure of
over the decade leading up to 1990. The widely-followed contest originated in the pages of
Social Science Quarterly
, where Simon challenged Ehrlich to put his money where his mouth was. In response to Ehrlich's published claim that "If I were a
, I would take
that England will not exist in the year 2000" Simon offered to take that bet, or, more realistically, "to stake US$10,000 ... on my belief that the cost of non-government-controlled raw materials (including grain and oil) will not rise in the long run."
Simon challenged Ehrlich to choose any raw material he wanted and a date more than a year away, and he would wager on the inflation-adjusted prices decreasing as opposed to increasing. Ehrlich chose
. The bet was formalized on September 29, 1980, with September 29, 1990, as the payoff date. Ehrlich lost the bet, as all five commodities that were bet on declined in price from 1980 through 1990, the wager period.
I am going to listen to Neil Young and Joni Mitchell on Spotify now.
There is an additional benefit to planting soybeans in this environment. Not only do soybean NOT need nitrogen fertilizer (I don't know about potash or potassium) but soybeans, like most legumes and beans, actually "fix" nitrogen in the soil they are planted in. This is why so many Midwestern farmers rotate between corn, which uses a ton of N, and soybeans which put N into the soil.
Pays to marry a farmgirl from Nebraska. Plus, her dad had 3500 acres of prime pheasant habitat. Love comes in many forms:).
A couple additional highlights (of which I'm sure you are aware but, hey, it's 4:30 AM and I have to get the brain cells firing efficiently somehow): Re: oil exploration I don't think it's just the current policies of the administration that are holding drillers back. Listen to the rhetoric of the administration about their goals. Look at the ESG drive at managers like BlackRock and at the SEC. Look at the board takeovers at companies like Exxon. In surveying the landscape, would you, as the CFO, conclude that a good long-term bet for your capital was to take advantage of one of those 9,000 leases Jen Psaki keeps ranting about or would you be hedging your considerable carbon bets right now? Exploration is down not just because of what Biden has done but also because of what's anticipated yet to come. of those 9,000 leases, how many are actually going to contain oil? Nobody knows for sure. Exploration is expensive. Nobody in the current environment is going to make a long-term capital bet on a short-term change of rhetoric from these economic simpletons.
As for Hunter and Burisma, my understanding of that situation was that Burisma had made a significant bet on its relationships with the Yanukovych regime. With the Maiden revolution and the West's new influence likely to play a bigger role in 2014 the board and leadership was scrambling and how better to ensure you can make the deals you need to than to hire the son of the guy in the West's most powerful nation who was tasked by his boss to handle the "Ukraine Portfolio" (these people and their "portfolios")?