As I’ve said before, it’s important to know the market relationship between livestock and the grain market. The price of livestock plays an important role in the grain market and vice versa. That’s exactly why this chart caught my eye:

As you can see from the chart, livestock demand has been tricky to forecast over the past few years. That’s partially because so many factors influence consumption: income, diet, price, just to name a few. Overall livestock consumption since 2006-2007 is down – but a resurgence looks to be on the horizon, led by strong demand for chicken.

And that’s only one side of the story – the other side is supply.

Much like the expedited hog harvesting mentioned last week, cattle farmers also stepped up slaughter when economic conditions turned bad with the financial crisis. The cycle from birth to maturity is longer with beef than with chicken. So it’s difficult to increase supply quickly. The dramatic herd reduction in 2008-2009, sending off even milk cows, is being felt now in reduced supply.

As the chart above shows, we’re at the lowest supply level of beef cows in 25 years. And even though beef consumption is lower, the mass reduction in cattle head has now supported price recovery that looks to pressure $100 per hundredweight on the upside once again.

This from The Financial Times:

Americans face higher beef prices for their traditional end-of-summer Labor Day barbecues following a late-night stampede by meat packers this week that helped send cattle futures to their highest levels in nearly two years.

Negotiations between slaughterhouses and feedyard operators with cattle to sell took on a frantic tone this week, with talks stretching late into the night on Wednesday – a rare occurrence for cattlemen used to wrapping up their affairs by sundown.

“[Wednesday] night may have been the latest bidding I have ever seen,” said John Josserand, president of AzTx Cattle in Hereford, Texas, which operates facilities that can feed 250,000 cattle at a time. By Thursday, the frenzy spread to the Chicago Mercantile Exchange, where live cattle trading volume broke records and futures prices jumped to $1 a pound, the highest level in 22 months.

The tumultuous trading came after rallies in markets for other agricultural commodities have raised fears about global food price inflation. Wheat prices have soared as a drought in Russia destroys grain crops. CME pork bellies, used for bacon, have hit all-time highs this month.

“There is growing concern that food prices are going to head north,” said Bob Goldin of Technomic, a Chicago food industry consultant. US cattle supplies have declined as ranchers culled herds to offset losses during the recession and calves emerged from the hard winter with less meat on their bones than usual.

However, exports from the US, the world’s largest producer, are expected to rise 13 per cent this year, led by shipments to Japan and South Korea. Americans also appear to be regaining a taste for beef after cutting back during the economic downturn.

“What’s exciting is beef demand has stabilised into the summer,” said Rich Nelson, director of research at Allendale, a futures broker in McHenry, Illinois. Meat packers bought heavily this week to secure supplies for the September 6 Labor Day holiday, Mr Nelson said.

By Thursday, meat packers had bought 201,000 head of cattle across the central US, up 11 per cent from the previous week, the agriculture department said. Cargill, JBS, National Beef and Tyson Foods account for three-quarters of US beef packing activity, analysts say.

Supply and demand will help show the way for livestock – but pricing and risk/reward payouts will ultimately decide if we should saddle up and wrangle a cattle position. I’m watching this situation closely.

Alan Knuckman
for The Daily Reckoning

Home on the Range originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

I think the coffee price is heading higher.

Right on cue, the announcement last week of higher storm estimates for the 2010 hurricane season has started to impact commodities. The National Oceanic and Atmospheric Administration, is predicting an above-average year of tropical storms for the Atlantic basin.

According to USAToday:

The agency’s forecast for 2010, released today, calls for 14 to 23 named storms in the Atlantic Ocean, Caribbean Sea and Gulf of Mexico.

Of those named storms, 8 to 14 should become hurricanes, including 3 to 7 “major” hurricanes, with wind speeds above 111 mph, the agency says.

Tropical storms are given a name when wind speeds reach 39 mph, and are upgraded to hurricane status when sustained winds reach 74 mph. An average Atlantic hurricane season sees 11 named storms, including six hurricanes, with two becoming major hurricanes.

If this outlook holds true, this season could be one of the more active on record,” NOAA chief Jane Lubchenco said today at a press conference.

Some of the markets most affected by hurricanes are surely the soft commodities – coffee, sugar, and cocoa – which I want to discuss now.

Storms are a big deal for commodities because they impact the supply and demand equilibrium that would otherwise take place in the market. If a major storm system severely restricts coffee production, for instance, supply gets choked off, and prices rise as a result. That’s a very good thing for commodities investors who place bets expecting prices to rise during storm season…

Right now, I think that one particular soft commodity – coffee – could be best poised to profit.

Coffee looks ready to test the $1.38 level for the third time since April. A strong triple bottom with prices holding $1.30 January, March and now April/May is very encouraging for bullish rallies.

Here’s more from Bloomberg:

Coffee futures climbed the most in four weeks after a tropical storm slammed Guatemala, Central America’s largest producer. Cocoa also gained.

Landslides and flooding killed at least 82 people and left 53 missing, David de Leon, a spokesman for Guatemalas national disaster agency, said yesterday. Downed bridges and landslides cut off access for some coffee growers in western Guatemala, said Lucrecia Rodriguez, a deputy manager at Anacafe, an industry trade group.

People are concerned about the conditions in Guatemala, said Tom Mikulski, a senior market strategist at Lind-Waldock, a broker in Chicago.

When it comes to staking out your own coffee position, time is of the essence…

Needless to say, I’ve already briefed my Resource Trader Alert readers on the coffee spread play that I think is best positioned to profit as the spot price continues to climb. Our coffee spread position looks especially attractive right now since the higher strike options have little chance of any return.

But if you’re willing to accept a less super-charged path to coffee profits, you can get decent exposure to coffee through an exchange traded note, the Barclays Capital iPath Coffee ETN (NYSE: JO). JO is a pure play on coffee; that’s the good news. The bad news is that JO is not an actively traded security. With a market capitalization of only $12 million, JO rarely trades more than 10,000 shares a day.

The summer weather promises to be a bit wilder than usual. So keep your eyes on the “softs”…especially coffee…and look for opportunities to profit.

Alan Knuckman
for The Daily Reckoning

Buy Coffee originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

During times of market instability and uncertainty, Treasuries are bought as protection and safe haven investments – if stocks go down bonds go up and vice versa. During the financial crisis stock sell-offs from 2008-2009, the Dubai debt issue and, most recently, the Greece default concerns, bonds rallied as a knee-jerk reaction. The flow of money from stocks into bonds illustrates a lack of confidence in the equity markets.

After the midday sell-off Friday, bonds failed to make new relative highs, signaling less fear as the session moved to the close. Stock price action Monday was positive and Treasuries have remained below the recent highs for now – all clues that the worst may be over for now.

Alan Knuckman
for The Daily Reckoning

The Goldman Selloff…and Rebound originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Last week has definitely gotten our attention, but remember, we have seen this action repeatedly before. For the last 10 months, every time the market looks like it will turn down, it has responded with a rally to new relative highs. Take a look:

One component in pricing for the options that we trade here at Resource Trader Alert is volatility. For our purposes, it helps us determine simply to buy an outright option if prices are cheap or to purchase a spread if they’re expensive. An increase in volatility is an increase in price movement – and don’t forget we need the markets to move in order to make money on our positions.

It may be cliché, but my nearly 20 years of experience makes me most afraid when others are not and gives me a sense of calm when the public is frantic and unhinged… Risk is always quantified and controlled with our strategies and that does not change as volatility increases, but opportunities do.

The Return of Market Volatility originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Lately, the stock market has been grabbing most of the headlines for its surprisingly strong performance since last March. But commodity prices have been surging as well. Favorable macro-economic trends are powering both markets.

The S&P 500 Index is up more than 50% from its March lows. Meanwhile, the CRB Index of commodity prices recently broke above the 280 level making new yearly highs – about a 40% advance from the lows of last year.

Therefore, no matter what America’s grim economic data may be saying, the stock market and the commodity markets both agree that some sort of recovery is underway.

I how no opinion about where stock prices are headed next, but I feel fairly confident that commodity prices will continue trending higher over the coming years. That said, many commodity markets have already posted such large gains during the last few months that some investors may be skittish about climbing aboard.

I understand this fear, but investors must remember that commodities are not homogenous. Even though many of them have soared this year, some commodities have advanced very little. Corn is one of the notable laggards…and I think it has some catching up to do.

My recent research travels took me to the West Coast to revisit acquaintances made during the July National Chicken Marketing convention. (Yeah, that’s what I do for fun!)

My big takeaway from this chicken confab was that most of the presenters and professionals in attendance believed that $3.00 corn was way too cheap and that corn prices would begin moving higher. I trust these guys. After all, it’s their business to know the cost inputs from the egg to the bird on your plate. But their bullish outlook for corn was a minority opinion at the time.

Back in mid-summer, when this convention took place, the corn crop looked likely to make it through the summer months in great shape, with no threats in sight to disrupt high yields. Consequently, corn prices were languishing near multi-year lows.

But as it turns out, the “chicken crowd” was right to believe that corn prices were too cheap. And the corn price charts from last summer confirmed the strong potential for even higher prices. Though my view on trading weighs heavily on technical analysis, I learned long ago not to ignore important fundamental information. At the lowly price of $3.00 a bushel, the upside potential for corn seemed much greater than the downside risk.

That’s why I urged the subscribers of my Resource Trader Alert (RTA) to enter a bullish trade on corn. Over at RTA we use options to directly play commodities themselves — options help limit our risks, while still providing ample opportunity to profit.

I recommended a six-month-long option play on corn, designed to benefit from any strong up-move in corn prices. The specific trade I recommended cost just a little more than $1,100 to initiate. I was looking for corn to move to $4.00 a bushel by then end of this year. But as it turned out, we hit that target in late October, which caused the value of the corn trade I recommended to more than double.

That’s just how quickly the commodity options can move – a 25% rally in corn prices caused the recommended corn options to double. By using options we were able to maximize our profit potential and substantially limit our risk.

The reality of fundamental trading on things like weather, planting intentions, yields, exports or crop disease is that the information does not flow freely to everyone at the same time. The farmers, seed salesmen and grain elevator operators use their legal inside information in the market before others. Often, price charts reflect this “insider knowledge.”

In other words, a price chart can provide an early indication that a market is about move into a bullish mode, even before any broadly disseminated public information would confirm the rising prices. Therefore, when you combine technical analysis with the informed insights of industry insiders, you can shift the odds of success greatly in your favor.

After a brief correction, corn is on the rise again and trading just above $4.00 a bushel. I’m staying with this friendly trend for now.

Regards,

Alan Knuckman,
for The Daily Reckoning

(Some) Commodities Are a Buy originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

The same ‘evil’ forces also drove crude to $33 a barrel earlier this year, but for some unclear moral reason, it is good to push prices lower? This same logic doesn’t apply to stocks because when financial stocks were seen as overvalued, selling restrictions were put in place to prevent downward pressure. We all know that only made the problem worse and delayed the inevitable, dragging out the outcome longer.

The futures markets need more (not less) speculators to ensure smooth price movement for all participants large and small. These markets exist for hedgers to lock in costs and run a more efficient business. Using futures to fix volatile commodity cost inputs can go far to ensure corporate profit and price stability for end consumers. Without the combined strength of speculators, who will take the other side of the massive Southwest Airlines fuel hedge?

Oil is the hot-button issue, but people fail to focus on the core issue. OPEC is a cartel. The organization is designed to manipulate the markets and prices for maximum profit. Some in government are attempting to control the tail of this lion, not the man-eating king of the jungle.

Should Oil Speculators Be Banned? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

For me, the risk on natgas is on the upside. In other words, I don’t want to risk missing a big upturn. Prices have already fallen from $12 down to under $4 — which is a $40,000 move per futures contract. For my taste, the upside potential far outweighs the chance of the downtrend continuing much lower. Gas cannot go to zero. It will always have some value, and many fundamentals can change the present landscape of low, low prices.

Thankfully, very few ‘sheeple’ are grazing on the green, green grass from natural gas demand. Significant supplies are used to produce the fertilizer necessary to feed the world. Natgas also provides much of the electricity to cool our cities in the dog days of summer.

Plus, the hurricane season is always a wild card that can add risk premium. Any weather disruption can spark an explosion in prices. Katrina and Rita sent prices to all-time highs just a few short years ago. You don’t go shopping for an umbrella after the rain starts.

Think of your reaction to possible oil plays back in February when no bottom was in sight — that’s how natgas feels now. Being ahead of the energy curve is the place I want to be. When things don’t develop as planned, the losses at lower levels are manageable. Probability is on our side that eventually natgas prices will move up.

A Commodity Speculation originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Nobody liked crude oil at $35 a barrel, right? And why it is easy to love gold at $950?

These are important questions if you want to get ahead of the herd.

As a young trader I was taught about the “Wall Street Journal Effect” where seasoned traders took profits when an article appeared in the paper. Things have changed with the Internet, which gives access to information like never before, but the premise is the same. Get in early and get out as others start to catch on.

The risks are often lower before a major move. And a breakout can be a confirmation that you are on the right side. By the time most investors are comfortable enough to put in their precious funds, big money has already been made by some. It’s human nature, the fear of missing out may outweigh common sense when choosing opportunities.

Nobody wanted stocks when the Dow was struggling at 6500 but those same people are now testing the waters 2000 points higher.

So what am I looking at now?

Well, as a commodity guy and the editor of Resource Trader Alert I’m always looking for the best moves in hard assets.

A neglected sector that has gotten my attention is natural gas. The last few months have shown resurgence in crude with the global economy stabilizing and demand picking up. Overall crude itself has more than doubled from the lows with nat. gas lagging far behind.

For me the risk on nat gas is on the upside…in other words, I don’t want to risk missing a big upturn. Prices have already fallen from $12 down to under $4 – which is a $40,000 move per futures contract. For my taste the upside potential far outweighs the chance of the downtrend continuing much lower. Gas cannot go to zero, it will always have some value, and many fundamentals can change the present landscape of low, low prices.

Thankfully very few “Sheeple” are grazing on the green green grass from natural gas demand. Significant supplies are used to produce the fertilizer necessary to feed the world. The Potash to increase crop yields has been a big mover the past few years with low grain carryover forcing farmers to get every kernel or pod out of the ground possible. Nat gas also provides much of the electricity to cool our cities in the hot dog days of summer.

The hurricane season is always a wild card that can add risk premium to prices. Any weather disruption can spark an explosion in prices. Katrina and Rita sent prices to all time highs just a few short years ago. You don’t go shopping for an umbrella after the rain starts.

Think of your reaction to possible oil plays back in February when no bottom was in sight. Being ahead of the energy curve is the place I want to be. When things don’t develop as planned the losses at lower levels are manageable and probability is on our side that eventually prices will move up.

Byron King, over at Outstanding Investments gives you a superb list of natural resource stocks – and over the long haul they will outperform the general markets. But if you want to grab some quick trading profit, then you’ll have to plan accordingly. It all comes down to trading discipline, and knowing when to take advantage of a certain sector.

It all comes back to commodities,

Alan Knuckman
for The Daily Reckoning

How to Become a Better Investor originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

The stall has disappointed many market watchers — with some calling for a new downturn. Over my years I have found it better to follow the trend without trying to catch the turn. Don’t be too proud to miss some of it. Most of the money is made in the middle of a trend, and that’s where we’ll stay here at Resource Trader Alert.

Volume seems light and something is needed to spark movement after the large bull run. The S&P 500 channel — with lows last week at the 899 level (as a support level) and highs at 925-plus — is an area to watch closely for future clues. At the same time, Treasury bond futures weekly highs at 117 and lows at 114 have held traders in check. The breakout for either asset class will light the way down the future path for the markets.

For now, let’s wait and see what trend develops. Have some wine, and let the market sort things out.

Don’t Fight the Trend, Even if There Isn’t One originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Remember back in March when the Federal Open Market Committee made a surprise announcement that it would spend Treasury funds to support long-term government bonds?

This announcement rocked the world. The 30-year Treasury bond futures jumped almost 8 full basis points ($8,000 per contract), sending rates crashing lower with the yield on the widely followed 10-year note down to 2.5%, from over 3% in one day. As a direct result, the dollar was smacked down nearly 500 pips ($5,000 per contract), versus the euro currency.

This last-gasp financial plan to purchase and support the Treasury market was and is, at best, a short-term fix to prevent the bubble of all bubbles from bursting.

If we flash back to last fall, the stock market panic was driving some investors to guarantee a negative return on their money for the safety of the full faith and credit of the Federal Reserve.

That same money that ran to bonds in order to escape equities is in danger of unwinding and going on the move again – after all, money goes where it is treated best.

Don’t believe me? Just ask Warren Buffett.

In his 2008 letter to shareholders Warren Buffet described the situation this way, “When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the US Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.”

The Fed’s action follows similar tactics used by the Bank of England, which pledged up to 150 billion pounds toward buying its government bonds. This quantitative easing of buying debt with newly printed money expands the deficit and, most importantly, is the match lighting for inflation.

According to Edward Chancellor’s skeptical commentary in the Financial Times:

There is no question that a determined central bank can get rid of deflation. It is simply a question of printing enough money. Economists have another term to describe the monetization of government debt. The history of “seigniorage” goes back to the debasement of the coinage under the Roman emperors. Seigniorage is really a tax on holders of money and government debt which is paid via inflation. When carried to excess, it leads to hyperinflation.

This leads to the eventual sale of accumulated bondholding by the government and the impending pop of the bubble, leaving greater financial issues in the long run. Unnatural forces at work in the market can only serve to exacerbate the problem.

As witnessed by the market action in May, restless investors are searching for higher returns on their money than the pittance they chose to accept last fall for safety.

At that time, the dollar and Treasuries sold down to lows not previously seen in the last six months. More selling is in the cards as an appetitive need for risk increases with general global market confidence.

Human nature will lead some to move money out of safety and chase higher returns in the fear of missing out on a stock market turnaround. Emotion can be a great detrimental force and can disrupt a sound disciplined investment plan. Don’t miss this flow of funds! How? By positioning yourselves in hard assets.

The unprecedented movement of funds into Treasuries was and is a concern – but it’s also a huge opportunity when that money comes back into the market. The numbers will be staggering. The gold market moved over 40% with just the spillover money seeking safety in the financial chaos.

When even a small portion of that moves into hard assets, the commodities bulls will be on the stampede again…for oil, gold, soybeans, silver, wheat, coffee, and more.

People will continue to drive, heat, eat, produce goods and services, and put the “consume” in “consumer.” Conspicuous consumption may be out, but pent-up demand for goods we need has only been delayed, occasionally to extreme consequences. Consider this example from the Associated Press:

Store Owner Gives Would-be Robber Bread and $40

SHIRLEY, N.Y. (AP) – A Long Island convenience store owner who was confronted by a bat-wielding would-be robber has shown mercy on the man by giving him a loaf of bread and $40. Convenience store owner Mohammad Sohail pulled a rifle to defend himself against the would-be thief, who then dropped to his knees and begged for forgiveness.

The man explained that he was battling economic hardship and was just trying to feed his family. Sohail put down the rifle and gave the man $40 and a loaf of bread.

Another sign of economic transition was the jump in short-term rates a week ago, pricing in a quarter-point rate hike down the road. In Agora Financial’s Resource Trader Alert we’ve been concentrating on the bond sell-off described above, and have been doing quite well with the Treasury unwinding. However, the market is now acknowledging that rising rates are also something worth watching closely.

Keep an eye on movements in the dollar. The dollar index weakness down to the December lows at 78 was not calmed by a rise in long-term yields. The inevitability of the Fed eventually raising rates to address inflation fears strengthened the greenback back above 81.

Stocks continued to extend their upward run 11 out of the last 13 weeks. The major indices have been in the positive for 2009. Some consolidation and profit taking will likely take place after these new relative highs.

This next step forward will include some global demand rebound as life continues on for the billions around the world who are not money managers, bankers, or insurance executives mired by overleveraged portfolios and bad bets.

Commodities and things of real value should do very well. This new upward phase in the asset market is taking place after a bottoming from the recent and unnatural price depression of vital resources that are consumed every day.

It all comes back to commodities.

Regards,

Alan Knuckman
for The Daily Reckoning

The Bubble of All Bubbles originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.