"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Thursday, August 7, 2014

Russian Food Ban sends Livestock Futures Reeling

Russia has announced a retaliatory ban on food products from nations supporting the sanctions that were imposed on it in response to the ongoing events in Ukraine.

Personally the food ban is going to do nothing except to hurt their own citizens by driving up the cost of food there but it has just knocked a huge chunk of profitability out of the pockets of US livestock producers.

Here are the cattle and hog charts. You can see the carnage that the ban has produced. August cattle are limit down. Feeders were down the limit but have managed to bounce slightly. There is some buying coming into the August  fats as it pops off the limit but selling remains heavy at the moment.

Hogs are getting sucked into the downdraft with the impact being felt more so in the 4th quarter contracts rather than the August which is already deeply discounted and goes off the board next week.

This is the reason that I have been suggesting to both cattle and hog producers for some time now to secure downside hedge protection on expected Q4 production. As a producer, you simply do not have the luxury of staring record profits in the face and not doing a single thing to LOCK IN those profits and GUARANTEE yourself some outstanding, once-in-a-lifetime profits on your product. One never knows what sort of event came come out of the clear blue sky and strike. In a single moment, all of those profits have now gone up in smoke, vanishing, never to be regained. Speculators can play this game but not producers. You are in business to make profits; not risk them. Take them while they are there and lock them in when you can, not when you have to. Remember that if you are a producer of any sort.

My own view is that the market overreacted to the news since Russian red meat demand from the US has lost quite a bit of the significance that it once held over our markets many years ago. I recall trading hogs one year in which Russia announced a ban on US chicken. That sent the entire hog industry into a state of collapse ( it was back in 1996 if memory serves me correctly).

Our export markets have grown considerably since then with a large array of good and reliable importers from abroad. However, old habits die hard and the knee-jerk reaction was to sell first and ask questions later. Once that occurred, the fund computers took over and that is pretty much all she wrote for the rest of the session.

A quick note - The US Dollar is back up there knocking on that overhead resistance door near 81.66 basis the USDX. Safe haven buying is supporting the Dollar as well as bringing buying into gold and the US bond market. If the Dollar does managed to stage an upside breakout, I suspect gold is going to struggle once geopolitical issues fade.

As said many times here of late, gold bulls are basking in the geopolitical fears around Ukraine. As long as that is on traders' radar screen, the metal will hold as it will find dip buyers. If that event were to lose its significance in the minds of traders ( and unless one has an infallible crystal ball and unerringly knows the future when that might occur ) look for selling pressure to hit the metal. Until IF/WHEN that happens, support is intact under the market. All I can say is that traders who believe the Ukranian fears are overrated are going to be selling this rally. Those who look for the situation to worsen, will be buying the dips. One side or the other will eventually be correct. So unless you infallibly know the future, be careful but above all, ignore EVERYONE who is making price predictions about the metal. They know nothing further than any of the rest of us how all this will play itself out.

Beneficial rains are bringing pressure on the grain markets this morning after they experienced a "Ukranian bounce" in yesterday's session. Weather across the Midwest looks ideal for corn and beans to finish up. Corn is essentially made at this point. With beans ahead of last year's pace, the August weather thus far has been almost perfect. Tight old crop supplies in the hands of domestic crushers is supporting the bean market for the time being. Crushers are not turning loose of those beans and that has so far resulted in no deliveries against those August contracts that are in their delivery period. This is going to be interesting to see as the basis weakens.

My own personal view is that the crushers who are holding those beans back are propping up the entire bean market, both old crop and new crop. That is keeping farmers from selling but it is also going to be an important factor as S. American farmers get ready to plant down there. With beans being out of whack price wise against corn, odds would favor more acreage going to beans at the expense of corn. I am concerned that a huge crop here in combination with the potential for huge acreage going to beans down in the Southern Hemisphere, could leave a large number of US farmers stuck with very little in the way of downside price protection at the same time available storage is in going to be strained.

I cannot tell US crushers how to run their business but I believe that they are going to end up hurting many US farmers as they play this game of chicken with the market.