Greed creating Greed

On Friday October 31st, VeraSun one of the nations largest publicly held producers of ethanol declared Chapter 11 bankruptcy protection. In a statement the company said that in a panic mode they locked in $6.75 to $7.00 corn, which sank to $4.00. In the process VeraSun said the company had lost $63 to $103 million due to bets on corn. Why the range? Haven't they figured it out yet? On Sunday November 2nd an article in the Sioux Falls Argus Leader covered a letter, which was sent to the Secretary of Agriculture, Ed Schafer, requesting help from USDA in the form of loan guarantees for banks lending to agribusinesses. Among others, the letter was signed by the National Corn Growers Association. Let's remember one thing now. It is the NCGA that almost single handedly greased the pockets of every congressman and achieved passage of the federal mandate to produce ethanol, the Energy Policy Act. To think that the NCGA, after spending millions of dollars on congressmen to pass EPA would have the gall to ask for loan guarantees for some of its largest members, such as VeraSun is a vulgar and hideous act.

In fact, NCGA and congress and President Bush are totally responsible for placing almost all of the livestock feeding industry in bankruptcy. If anyone should have access to government loan guarantees it is the cattle and hog and poultry farmers of the USA. These are the people and companies who have suffered measurably in terms of major financial losses because of the extraordinary high price of corn during this past year, all driven by the NCGA greed for high profits from a product mandated by the federal government.

What a combination for financial disaster. The largest lobby in the country in combination with greedy congressmen and women.

NOW THE OTHER SHOE DROPS

For the past two weeks we've been putting up with the highly leveraged institutions like Merrill Lynch, AIG and Lehman Bros. as they liquidate their long positions in almost every commodity that exists. But the de-leveraging continues and now the other shoe drops. Yesterday UBS Bank, a very solid and well financed institution announced they are exiting the commoidty business, except for metals. WHAT?? Getting out? You mean quiting -- completely?? That's it Baby. UBS stated they are reducing exposure to maintain stock holders confidence. There's another way to reduce exposure to maintain confidence, and that's to reduce the overal lending portfolio. That's going to be next, but probably not announced. In fact this crisis is causing the entire economy world-wide to slow down. This may not be a depression but it's coming very close to serious deflation. We're taking the fat out of the economy. The housing sector and real estate is first and there's a lot of fat in this sector. The next could be energy, and then automotive and foodstuffs. Do you suppose somewhere along the way we could include hospitalization and medical care?

It's Time to Protect Feedstuffs

We've been waiting for this opportunity since the end of March 2008. Waiting for the chance to protect the pricing of corn and SBM at a level that a hog and cattle producer can live with in a finishing ration. December corn closed yesterday (9/30)at and $4.874 and March corn at $5.064. This means that corn for the first quarter of 2009, if protected at $5.05 and after cash basis can be purchased at a level of from $4.65 to $4.85. SBM for the month of March closed yesterday at $292.80, the first time under $300 in several months -- just like corn. At that price hogs can be sold on today's futures at a profit, which again is what we've been looking for. An opportunity to price corn and hogs at a profit or better.

My suggestion is that producers take this opportunity seriously and place orders immediately to price from 25% to 50% of all corn and SBM needs for the first quarter of 2009 at these prices available. I would also place orders for 15% to 40% of all corn and SBM needs for the second quarter and further out. Having completed this watch for continued opportunities to purchase or protect at lower prices. The commodity futures markets are on the run because of the sell-off of long positions held by the once-in-favor, and now not so-much-in-favor index funds. Part of the investment banking melt-down. Take advantage of the opportunity. As producers we've been behind the eight ball long enough. It's time to schedule in some profits.

Full Feature Entertainment with Breaks

It's not over yet. The rumor mill has it that Goldman Sachs could be in trouble too. If so they have a 200 billion dollar Index Fund. Try unwinding that and see what happens to the commodity futures charts. Also, last evening the national news listed Washington Mutual (WaMu) as looking for a buyer, but there were no bids. Help me out; didn't the news quote WaMu as been the sixth largest holder of US home mortgages?

The corn, soybean, cattle and hog futures (among others) have been catching the brunt end of liquidation during the past couple of days. Open interest contracts have disappeared by the thousands in all commodities, meaning the longs are leaving town. That's actually not good for the economy as a whole. It means that someone is loosing a lot of money, and also that the tax payer will probably be picking up the tab for a lot of it. Let's hope when it's all said and done that we don't see a bunch of executive umbrella's floating down to earth.

Strange Bedfellows

September 17, 2008

The fall-out of the investment banking industry is creating some interesting partners to say the least. Merrill Lynch has been purchased by The Bank of America (one could call this a "shotgun marriage") and Lehman Bros has filed Chapter 11 bankruptcy, both of which are normal courses of action in financial turmoil.

However, as Don Roose (USC) reported today the US government was forced (forced ??) to take a 79.9% ownership interest in the largest insurance company in the world, infusing 85 billion dollars into AIG. AIG has some solid assets this will help them sell, and it helps stabilize the world economies. BUT the US government as a result now owns a majority interest in the largest insurance company in the world and 52% of all US housing mortgages after taking over Fannie Mae and Freddie Mac. The Fed is also pumping huge amounts of money into the financial sytem. So much for a free economy with no strings of tie to the federal government. To quote a friend; when you keep partnering strength with weakness you ultimately get weaker.

Don Roose of USC continues to be concerned about the huge Dow/AIG Index fund. How much of a huge postion has been liquidated is unknown. Open interest in corn was down 12,218 contracts yesterday indicating long liquidation, soybeans were down 843 contracts indicating long liquidation, cattle open interest went down 1,759 contracts and hogs went down 6,004 contracts --- all in one day. In corn, soybeans, cattle and hogs it created an almost "limit down" day.

The concern is that AIG may have large postions yet to liquidate in the futures market. It does not make sense that the US government now owning 79.9% of AIG, would want to be long futures positions. Remember the recent CFTC investigation into commodity futures buying? As I said earlier, this needs to be a time of real caution for those managing risk.

Financial Market Meltdown

As you may have noticed the investment banking industry is currently going through a financial meltdown. This includes the Chapter 11 filing of Lehman Brothers (the 4th largest U. S. investment banking firm), Merrill Lunch which is merging into The Bank of America, AIG which is looking for a buyer (I can't imagine the size of the purchaser), and Bear Sterns the owner of a large commodity investment arm. Incidentally, Lehman Brothers owned 25% of Omni Fund the billion dollar index fund which liquidated last week.

Granted, all of the above were large players in the housing sub-prime mortgage debacle, which also includes Freddie Mac and Fanny Mae, and a large part of their problems is the fallout surrounding the underwriting of sub-par mortgages. However, this activity was in part responsible for the billions of dollars flowing into the index fund investment world, which was in part responsible for the competitive write-up and driving-up of the commodity markets; including corn, soybeans, cattle, hogs, oil and other futures. As you know several index funds heavy in the commodity futures markets have already liquidated and there are more to come.

We may not see a dramatic shift over night, but its my opinion that we should be very cautious about the future direction of the commodity industry. It isn't that there won't be a buyer for 100 hog contracts or 500 corn contracts, because there will be. However, we may very well have seen the end of a new plateau for $100 hogs, $8 corn and $15 soybeans. We've talked before about the volatility of the hog industry and now we can add the financial investment industry. The next 12 to 24 months are going to be very challenging to those trying to manage risk, and it's a time to be very prudent about our goals and objectives.

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