Watching Commodity Deflation and Inflation

The chart of the week is the annual change in November retail prices for beef, pork, chicken and cheese.  The information is taken from the government Consumer Price Index data.  It’s important to keep this data in context.  The Consumer Price Index is a value of retail prices…not wholesale and not necessarily indicative of the appropriate wholesale markets.  Major food service buyers purchase at the wholesale level.  Still, I use the data to get an idea for demand patterns on the particular products.  In this case, you can see that cheese, pork, beef and chicken retail prices were all notably lower this past November than in 2008.  This suggests that movement should pick up for the appropriate items.  Of course, however, we have a challenged demand situation with the strapped US consumer which is probably the major reason for the depreciation in these retail prices.  But is worth noting, that retailers are featuring these items in an attempt to sell more goods which theoretically could lessen the overall wholesale supplies.  Beef and chicken prices were lower during November but still near average levels for the last couple of years which suggests modest additional product movement.  But November retail cheese prices were the lowest in 28 months.  And get this, November retail pork prices were their lowest since May of 2004…that’s over 5 years.  So maybe it’s not so surprising that wholesale pork prices have risen counter seasonally 22% higher since mid November.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading, ARA Hedging and the employees of all three companies. Commodity trading involves risks, and you should fully understand those risks before trading.

The Outside Markets Turning Bearish?

The chart of the week is the S&P weekly index.  Now this is not a chart that I am very comfortable about discussing as I am not an equity analyst.  That being said, I am paid to analyze commodities and this chart is a piece of pattern that we are watching very closely.  My apprehension comes from the charts, most notably, the S&P, crude oil, the dollar and commodity indexes.  First the dollar has appeared to make at least a temporary bottom.  At the same time, crude oil and the commodity index have pulled back, not surprising and certainly understandable given the appreciation we have experienced in these markets in 2009.  Lastly, the chart formation below in the S&P index suggests that a modest to notable correction may be near for the equity markets…at least we’re due for one.  Chartists look for confirmation between charts and that’s what fuels my uneasiness as these charts all seem to be pointing to a correction in the equity and commodity markets.  To be honest, I’m not smart enough to call for such a correction, I’ll just let the charts do the talking.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Historically Small Chicken Supply

The chart of the week is six week moving average for broiler egg sets.  Once a broiler egg is set it takes roughly ten weeks for a chick to be hatched, fed to an appropriate weight and then brought to slaughter for the US chicken supply.  Thus, broiler egg set numbers are a good indication of pending chicken output.  As one can tell from the chart, the six week moving average made a six year low last month which suggests that chicken output in the pending weeks will be historically light.  This may be one of the principal reasons we have experienced chicken breast market inflation as of late.  Going forward, lighter chicken output is anticipated to influence many of the chicken markets higher through next month.  However, broiler egg sets have seasonally surged upward during the last three weeks which should lead to expanded chicken output later this winter.  The chicken breast market could respond negatively to expanding chicken output unless demand can expand as well.  That being said, I think it’s important to notice that the upward trend in broiler egg sets in the chart, that started well before 2003, basically ended in 2007.  And given the reduction in the hatchery flock broiler egg sets and chicken output could be tempered for the foreseeable future which, overall, is bullish for the chicken markets.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Another Commodity Bubble?

The chart of the week is the monthly Continuous Commodity Index chart which is an indicator of overall commodity prices.  The index was formed in 1957 as a general benchmarking tool for commodities and is made up of 17 futures markets which are equally weighted (just under 6%) and include; corn, soybeans, wheat, hogs, cattle, crude oil and gold.  As one can tell from the chart below, the commodity index has risen roughly 48% since it bottomed nearly a year ago.  From a chartist’s perspective the appreciation in the last year appears to be healthy.  In a rising market, the downward moves should be faster than the upward moves and that is exactly what we have seen.  Additionally, the market reached the key 33% retracement (from the July 08 to Dec 08 decline) level in the spring, stalled for a few months and then moved higher.  Most recently, the market is challenging the key 50% retracement and appears to be edging through it as well which is bullish.  Now the question arises, what fundamental reasons are behind the increase in commodity prices especially given the state of the US economy?  Well, we do have the influence of a depressed US dollar value policy and building interest in commodities as an asset class but I would argue that there are supply and demand drivers as well.  The three largest corn crops we have ever had have occurred during the last three crop years and the soybean harvest has set new record highs in two of the last four years.  Still, existing corn and soybean supplies are historically limited, at least compared to earlier this decade, due to increases in demand.  And due in a large part to tighter grain supplies, protein and dairy production in the US are decreasing.  Annual beef, pork and chicken output are all forecasted to decline in 2009 which will mark the first time that all three decrease together in the last 38 years.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Cheesy Dairy Market Concerns

The chart of the week is the international cheddar and the CME block cheese markets.  US cheese inventories are historically ample and September US cheese output was 4% larger than the previous year.  Still, the cheese markets are moving higher.  Actually, basically all of the dairy markets are moving upward.  The first major culprit is the decline in US milk output.  The trade is anticipating a decrease in the available supply of dairy products in the coming months.  But another major reason is due to the recent run up in the international dairy markets.  The international cheddar, butter, whey and milk powder markets have all surged more than 30% since the beginning of September.  European Union dairy farmers, which typically account for 47% of the world’s cheese production and 40% of the world’s cheese exports, have been challenged during the past year with poor profitability leading to rising dairy farmer protests.  EU milk production is declining and decreases should intensify in 2010.  Additionally, the value of the US dollar has fallen roughly 18% during the last eight months.  Both of these factors encourage US cheese exports which was the major impetus behind the inflated cheese and dairy prices in 2007-08.  And the situation are similar for the rest of the dairy complex.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Cheese Bullishness

The chart of the week is the US CME block cheese and international cheese markets.  As one can tell from the chart, the two markets have trended fairly well together during the last eighteen months or so.  Why is this?  Well, the principal reason the surge in cheese prices started in the spring of 2007 and continued throughout most of 2008 is due to an increase in US cheese exports.  You may remember the scenario.  New Zealand, the world’s largest dairy exporting country, was in the midst of a two year drought which had caused their milk production to notably decline.  The EU, the world’s largest dairy exporting region, had stopped subsidizing dairy exports and their dairy cow herd was shrinking.  And, the US dollar was historically depressed.  You may notice that both markets have moved upward in recent weeks.  World dairy prices at the levels experienced during the spring of this year really aren’t sustainable with the existing feed cost structure in place.  Additionally, the value of the US dollar has declined 4% since August and is currently trading at fourteen month lows.  Further, the EU, the world’s largest cheese producing region, is reducing the size of their milk cow herd which could lead to a halt in cheese production growth.  That being said, the fundamentals may not support the intensity of the recent cheese market increases.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Prime Beef Supplies

The chart of the week is the weekly number of cattle slaughtered that grade prime.  As well documented for the past year, the percentage of cattle grading choice has been trending well above prior year averages.  This is due to a couple of factors including the trend of cattle staying on pasture longer and entering feedlots with greater maturity.  At times during the past year, the percentage of cattle grading prime has also trended well above prior year averages.  Right now is one of those times.  The number of cattle that graded prime during the third week of September was the largest for any week in thirty-four months.  During the first nine months of this year, both choice (1.8%) and prime (2.4%) beef production are estimated to be modestly larger than last year despite nearly a 4% decline in overall cattle slaughter.  The trend of abnormally high percentages of cattle grading choice and prime may continue, at least for the near term, and could be bearish for choice and prime beef prices.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Beef Prices and the Aussies

The chart of the week is the value of the Australian dollar (versus the US dollar) and the US 90% beef trimmings market.  What does one have to do with the other?  Good question!  First we remember that beef processors utilize trimmings to make various beef products including the ever popular hamburger.  Typically, a hamburger processor will mix 90% beef trimmings with a fattier trim, say 50% trimmings, to make their product.  In the US, we produce at lot of fattier beef trimmings.  So much so that we have an excess of 50% trimmings and a shortage of 90% trimmings.  Thus, we have to import a considerable amount of lean beef to make up the deficit.  And a lot of that lean beef comes from Australia.  We remember that when our currency is weak, it makes international products more expensive to us and our products less expensive to the world.  So, typically the impact of a rising Australian dollar is a deterioration in US lean beef imports which can be bullish for the 90% beef trimmings market.  Notice that 90% beef trimming prices set record highs in the summer of 2008 at the same time the Australian dollar valuation was setting a record versus the dollar.  Now you may notice that despite the recent run up in the Australian dollar (it made 13 month highs this week), the US 90% beef trimming market has mostly moved lower.  This is due partly to the recent increases in dairy cow slaughter.  However, dairy cow slaughter cannot be sustained at these levels for long and history tells us that neither can the 90% beef trimmings market at the current levels if the Australian dollar remains elevated.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Still Watching Chicken Production…Closely

The chart of the week is weekly chicken production and the boneless skinless chicken breast market.  Chicken producers have pretty much kept chicken output curbed throughout 2009 thus far.  However, as the chart indicates, chicken production has edged upward since July.  Broiler egg set numbers during the spring and early summer, which give us an indication of pending chicken production levels, did trend ever so slightly upward from earlier in the year which is partially behind the increase in chicken production.  But the biggest factor may be the relatively cool temperatures experienced in recent months throughout most of the country which has limited bird death loss.  The result is that chicken production during the last week of August was the largest for any week not following a shortened holiday week in nearly a year.  How have the markets reacted?  The chicken wing and leg quarter markets have held their own but the breast markets have been week.  So much so that the chicken breast markets moved counter seasonally downward in August.  As of September 9^th, the daily chicken breast index was in the low $1.20’s per pound, roughly $.30 off its high made in early July.  The general trend for the chicken breast markets is downward during the fall.  If pending chicken production is not curbed some then any imminent chicken breast declines could be steeper than the industry is anticipating.  Not good news for chicken producer margins.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Ethanol and Corn Dancing Again

Several months ago I wrote about the relationship of corn and ethanol and how inflated corn prices, amongst other factors, were causing the ethanol industry to come to a crossroad.  If you remember, ethanol producer margins were struggling and financial demand incentives for their product were basically nil.  The chart of the week is the economic incentive for gasoline blenders to utilize ethanol.  What in the world does this have to do with the food commodity markets?  A lot and then some.  Why?  Because ethanol in the US is primarily made from corn and corn is one of the major feed ingredients (and thus input costs) for protein and dairy farmers.  Ethanol in the US is almost entirely used to blend with gasoline at a 10% blend or less.  As a matter of fact, ethanol is most likely in your gas tank as you read this.  Roughly 5.5 billion gallons of ethanol annually have to be blended with gasoline in high pollutant areas of the US per the 1991 Clean Air Act.  However there is an additional 7.2 billion gallons of annual ethanol production capacity in the US (and it is growing) that is driven by economics.  In other words, does it make financial sense (or cents) for gasoline blenders to blend with ethanol or not.  The formula for the blenders’ incentive is simple; so long as the blenders cost for ethanol is below the cost of wholesale gasoline then it is a profitable endeavor.  With the existing $.45 per gallon subsidy that blenders receive for utilizing ethanol, the existing incentive is roughly $.70 a gallon…much better than earlier this year.  Models indicate that ethanol producer margins are solidly in the black as well.  And let’s not forget that the EPA is expected to soon increase the maximum blend percentage of ethanol from 10 to 12% which could further increase demand.  In short, ethanol and corn are not only once again dancing, they’re boogying.  The ethanol producers just have to make sure that a notably bearish crude oil market or late corn crop catastrophe doesn’t try to cut in on their groove.

These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this email, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.