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Welcome to the weekly resource brief where we break down opportunities in the dynamic commodities markets. The mandatory use of options allows us to control risk and take advantage of longer-term trends in the true Supply and Demand markets.
These futures options have many advantages and offer a more pure play with leverage on leverage benefits not available with typical equity options plays.
In addition to identifying profitable option plays, the intention is to educate, inform and even entertain with our discussion about the vital economic building blocks, Commodities, which are the underlying basis for all investments.
Briefing for May 8, 2012 - Participation Driving Em Crazy and Lean On Me CRB
Expectations are the scorecard not the actual economic data for sales, revenues or unemployment figures. Disappoint, and the harsh reality is met with unwinding selling sales.
The initial negative reaction to the April non-farm payrolls has roiled the markets once again even though 115,000 new jobs were created. A higher bar had been set for the last two reports as recovery forecasts pushed equities into bullish mode for 2012.
One major takeaway for skeptics of the rate decline to 8.1% was the numbers on labor participation. A 350,000 drop off in the number looking for jobs was attributed to frustration. Not so fast my economic friends, a major demographic change is that you may have heard of, baby boom retirement, is having an impact on labor market.
Every single day 10,000 people reach retirement age and drop off the eligible rolls of potential employees. This occurs for the nineteen years of the march to the golden age for this population bubble.
Actually the net impact of the report Friday was positive for jobs with 45,000 less than expected but 53,000 added in the prior two months revisions. Basic math puts that at a Plus 8000 job net increase.
A further look into the data had 500,000 previous employable people fall off over the past two months though 60+ retirement day parties over that time period adds up to more than that. Nefarious government plot, I think not...
Climbing the Protein Ladder
Continuous diet evolution around the world should help propel the need for feed as livestock consumption is on the rise. Protein demand changes are the result of emerging market economics. The chicken sandwich is a tangible edible reward for the move from the countryside to the factories in much of Asia.
Chicago Tribune May 1 - "U.S. barnyards help China supersize food output Record exports worldwide of breeding stock, genetic material in 2011"
While Americans cut meat consumption to the lowest levels in two decades, the Chinese eat nearly 10 percent more meat than they did five years ago. China's solution: to supersize its supply by snapping up millions of live animals raised by U.S. farmers as breeding stock, capitalizing on decades of cutting-edge agricultural research in America.
By taking this step, say breeders and exporters, China will move from small-scale backyard farms to the Westernized tradition of large consolidated operations to keep up with demand.
A taste for chicken
In a country wrestling with food inflation, China's population spent 25 percent of its annual income on food in 2010, compared with Americans spending about 10 percent. One solution to rising food prices: chicken.
A chicken drumstick costs half or less the price of a pork loin, said Wang Xiaoyue, a senior analyst with Beijing Orient Agribusiness Consultant Ltd. It also takes about half as much grain to produce a pound of chicken meat, compared with a pound of pork, Wang said. That has helped fuel more imports of broiler breeder chicks from U.S. farmers.
So has expansion by fast-food chains, including McDonald's.
McDonald's, which ranks China as its third-biggest market worldwide, opened a record 200 new stores in China last year and has unveiled plans for more. China, the world's most populous nation, isn't the only country doing this. Sales to Russia and Turkey, the biggest markets for U.S. livestock-breeding exports last year, have risen even faster.
But the impact of a vastly larger, more efficient livestock sector in China would cause a major shift in the global market, particularly for grain demand. China could need an incremental 22 million to 28 million tons of corn in the next few years just to keep up with the growth of the swine industry, according to a recent research report by Rabobank.
The United States exported a record of $664 million worth of live breeding animals, semen and livestock embryos worldwide last year, an 82 percent jump in two years, according to the Department of Agriculture's Foreign Agricultural Service. While countries like Russia and Turkey spent more last year, China was a big buyer on volume: About 14 percent of U.S. live animal exports, largely breeder chicks, were sent to China in 2011."
Sunday Fun Day
After a weekend to digest the job data the futures markets reopened Sunday night with new concerns about the Eurozone humpty dumpty plan to put all of the pieces back together again. Elections in France and Greece have torn off the band-aid to expose the unhealed financial wound.
The evening gap lower pushed equities below the 1350 support boundary in the S&P for the first time since February. The lows marked 1342.50 before a recovery rush back to 1370 during Monday's session. The reaction action to another attempt on that extreme will be a good market measure.
A weekly close below 1350 puts trade back inside the 2011 January to August 100 point trading channel. The 1250-1350 action projected a run to 1450 that was seems distant though only 7.5% above current levels.
2011 Review In Blue
The 2012 S&P peak at 1420 was 14% above the year-end closing mark and has now seen a healthy halfway unwinding pullback. Watch the 1350 pivot for insight into futures future moves.
The fundamentals of lower commodity prices have done nothing to support equities over the last few sessions. A staggering decline in Crude Oil from $106 last Wednesday to $95 support should alleviate gas price fears. Gold is also at the bottom of the six-month $1600-$1800 range and has seen no safe haven buying as a Euro fallback investment.
The list of commodities at yearly lows shows NOOOoooo signs of inflation pressures in silver, corn, copper, wheat, sugar, coffee, and hogs.
The CRB basket of commodities as a whole sits more than 15% from yearly highs, though it never participated in the last equity asset rally leg higher in 2012. Another test of the 290-support bottom will tell us a lot about the resource markets fate.
Grains on the Plains
A near perfect spring planting season has the grains ahead of schedule. The dollar difference in front month July corn at $6.30 versus new crop December at $5.30 a bushel has doubled over the past month though a long hot summer is still ahead.
Reuters May 8 - "Corn up on near-term supply concerns"
"Corn prices are higher, despite Monday's USDA planting progress report that showed stronger than expected weekly growth in corn plantings. "The U.S. (corn) market is tight," said Nicholas Higgins, an analyst with Rabobank.
"This is supporting prices throughout grains and oil seed sector. "We expect trade to be choppy until Thursday when the USDA report is due."
The U.S. Department of Agriculture is expected to release its first forecasts for the 2012/13 crop year in its May supply/demand report due on Thursday.
Corn supplies in the United States are on track to reach a 16-year low this year, but are expected to soar nearly 130 percent next year to a six-year high as farmers plant the largest corn area in 75 years.
A Reuters poll released on Monday that predicted Chinese imports of corn would grow almost 60 percent to 7.9 million tonnes in the year to September 2013.
The USDA report showed 71 percent of the corn crop was planted as of May 6, up from 53 percent a week earlier. Analysts polled by Reuters had expected the report to show 67 percent of the corn had been planted. Analysts have said timely planting of corn in the northern states is critical to adding the acreage needed to produce a crop big enough to ease the strain on supplies.
The USDA said soybean planting was 24 percent complete compared to 12 percent a week earlier. Soybean planting progress slightly surpassed the for the five-year average of 11 percent complete.
While soybean plantings surpassed analysts' expectations, a Reuter's poll on Monday showed the market expects Thursday's USDA report to show a decline in soybean stocks at the end of the 2011/12 marketing season, which ends on August 31."
Current Portfolio Positions
June 2012 Canadian Dollar (CDM12) 100.5 call at 160 points ($1,600): The CD$ sat at our option strike at the close Monday. The breakout move above 101.5 set up a potential 2 point run to 103.5. Canadian Dollar support had held the last drawdown at 99.5 and reversed prices higher. The move above 101.33 highs from March 1st signals a rally run. A sideways trading range between 99.5 and 101.5 sets up a breakout rally above 103.5. The At The Money option has a high Delta payoff on the CD$ price increase. The position sits at 91 points ($910), which represents a 43% loss. HOLD.
October 2012 Natural Gas (NGV12) 3.5 call at 160 points ($1,600): October NG may have finally found a bottom at $2.3 after the straight down decline from $3.2. The halfway recovery resistance sits at $2.75 to confirm a reversal higher. Time is an ally with the October option. A push above $3.2 in the October contract lights higher prices to the $3.7 target. The position sits at 9.6 points ($960), which represents a 40% loss. HOLD.
September 2012 Cocoa (CCU12) 2400 call at 160 points ($1,600): A rally run has pushed Cocoa back above $2350 and new month highs. Sep Cocoa found a base at $2100 in the last weeks and rebound back from triple digit losses in the last sessions. A secondary push to $2450 basis September contract set up an attack on resistance peak. Another thrust above $2450 sets up for a test of crucial $2500/$2550 to put in price bottom. The larger target of $2900 is the halfway point of multi-month decline. The position sits at 152 points ($1520), which represents a 5% loss. HOLD.
July 2012 Crude (CLN12) 110/115 call spreads at 152 points ($1,520): $102 support failed last week on the heavy unwinding sales. Prices sat at $106 Wednesday before the plug was pulled. The bull flag breakout above $105 sets up a rally run to $120. Crude prices had traded between $109.50 and $104.50 for weeks before a dip below the channel. Broken support at $102 recaptured to spark another rebound. The recent peak touched the nine month highs target at $110. The reversal has put crude at multi week highs again and above bull flag breakout. A full $30 retracement sets up for a move to $135. The position sits at 25 points ($250), which represents a 84% loss. HOLD.
June 2012 Gold (GCM12) 1750/1825 call spreads at 15 points ($1,500): Half of the spreads were sold at $1000 profit per position last week. The option premium had pushed to more than double the initial premium cost again on a run above $1750. Weekly support was tested at $1600 with only a reclaim of the $1700 level bullish in the near term. The push above the $1675 October lows targeted the next upside at $1725 and $1750. New relative highs at $1800 months ago still set a goal at $2000 an ounce on a breakout of the trading range. Expiration is May 24th. The position sits at 3 points ($300), which represents a 81% loss. HOLD.
July 2012 Corn (CN12) 700/850 call spreads at 32 points ($1,600): Old crop July Corn has pushed above $6.30 this week and sits a full dollar above December contract. A move above $6.70 sets sights on breakout run to $7.10+. The recent recovery and attack on $6.50 resistance revealed resilient trend strength. A Bounce off $6.00 has twice rallied Corn $0.50+ in the last months. A move back inside the range from $6.80 to $6.50 lows Oct 11 is a good sign to test recent highs again. The breakout above that highs at $8 projects a run to double-digit $10 Corn. The position sits at 8.5 points ($425), which represents a 73% loss. HOLD.
October 2012 Sugar (SBV12) 25/31 call spreads at 135 points ($1,512): A drop from 24 cents just weeks ago has pressured Sugar to new 6 month lows. The new dip below 21 cents has voided any bottom pattern. Sugar prices had hit lower lows at 22.5 cent area after pushing above 24 cents before the failure last week. Sugar prices had held again the critical quadruple + bottom at 22.5 cent area which now represents a bottom confirmation level. This was also the September and October three-month lows. The position expiration is over four months away September 17th. The spread sits at 25 points ($280), which represents an 81% loss. HOLD.
It ALL comes back to commodities!
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Alan Knuckman can be followed on Twitter at twitter.com/AlBk2Comodities .