US Cattle Herd Drops to 1958 Levels

Ranchers are culling the herds as corn prices soar and wholesale prices for beef and milk drop.

My personal view is that this is a manifestation of economic distortions and malinvestment due to government interferience in a variety of feed markets over a number of years, as well as paper speculation driving prices in a way that is not connected with physical supply and demand.

Is there a significant change in American dietary habits and an oversupply of beef and milk? It does not seem as though the retail prices of milk and beef are dropping in concert with this, which may be dampening demand.

Let them eat iPads and CDO's.

BusinessWeek
U.S. Cattle Herd Falls to 1958 Low as Losses Climb, Survey Says
By Whitney McFerron

Jan. 27 (Bloomberg) -- The U.S. cattle herd may have shrunk to the smallest size since 1958, as mounting losses during the recession spurred beef and dairy producers to cull animals, analysts said.

Wholesale choice-beef prices averaged $1.4071 a pound last year, the lowest level since at least 2004, as U.S. job losses climbed and meat demand waned. Corn, the main ingredient in livestock feed, jumped to a record $7.9925 a bushel in 2008 on the Chicago Board of Trade, and prices averaged about $3.79 last year, the third-highest annual average since at least 1959.

“There’s not much incentive to be building herds,” said John Nalivka, the president of Sterling Marketing Inc., a livestock-industry consulting company in Vale, Oregon. “Costs of production across the cow-calf sector and in dairy have gone up in the past two years, and prices have come down” for beef and milk, he said.

Futures prices for feeder cattle, the young animals that ranchers sell to feedlots to be fattened for slaughter, averaged 96.821 cents a pound last year on the Chicago Mercantile Exchange, the lowest level since 2003. Feeder-cattle futures for March settlement rose 0.2 percent yesterday to 98.975 cents a pound on the CME.

Slaughter-ready cattle futures for April delivery dropped 0.9 percent yesterday to 89.325 cents a pound.

Rancher Losses

Cattle ranchers in the southern Great Plains lost about $34 on every breeding cow they owned last year, following losses of about $18 a head in 2008, according to Jim Robb, the director of the Denver-based Livestock Marketing Information Center, an industry- and government-funded researcher.

U.S. beef production may total 25.45 billion pounds (11.54 million metric tons) in 2010, which would be the smallest amount since 2005, Robb said. The USDA forecasts output at 25.58 billion pounds.

“We’re forecasting that beef production in 2010 won’t be the smallest since 1958, because the average animal processed now weighs twice as much,” Robb said.

The number of young female beef cattle held back for breeding in the U.S. may have fallen to 5.45 million animals, down 1.4 percent from 5.526 million a year earlier, according to the average analyst estimate.

Dairy Cuts

Dairy farmers may be holding back 4.313 million young replacement cows for breeding, down 2.2 percent from 4.41 million at the same time last year, according to the average analyst estimate. The dairy herd is shrinking partly because of industry-funded cow culls last year aimed at supporting prices.

The so-called Cooperatives Working Together program removed about 252,000 dairy cows from production since December 2008, according to a statement on the group’s Web site.

“Last year was a terrible year for milk prices,” said Ron Plain, a livestock economist at the University of Missouri in Columbia. He said the industry-funded culling program is “one of the reasons why we’re down so much on milk-cow numbers from a year ago.”

The price of class III milk, used to make cheese, tumbled to a six-year low last year of $9.24 per 100 pounds, after global demand slowed. The price has rebounded 57 percent since then to $14.54 yesterday on the CME.

Natural Gas and Crude Oil: An Interesting Spread to Watch

The spread between Natural Gas and Crude Oil is now at an 18 year record low.

Nat gas has fallen from $13 to $3 while Crude Oil soared to $70.

Either crude is incredibly frothy, or natural gas represents an outstanding bargain.

A few years or so ago I published a fairly comprehensive study of the seasonality of natural gas, and some relative relationships with demand and supply. I will look for it, and see if I can update it. Since I no longer trade the futures I have not looked at this in some time. But I do remember the spreads and saw this one grown shockingly wide.

My first thought is that oil has been driven higher by monetary inflation and speculation, which are in some ways the same thing. Hot money craves beta and drives the prices of real assets to extremes.

Keep in mind that if enough people get in on this trade, the market makers who can see your aggregate holdings will use it to skin the speculators, without regard to fundamentals in the short term.

It's never easy.

The SP 500 and Short Term Indicators

The short term indicators are getting stretched to the downside, and the other narrower indices are approaching their own support levels.

Perhaps a techinical bounce at some point, but no higher than overhead resistance. A stairstep decline such as this can be quite damaging, and often will continue until it finds strong support, a footing and a V bottom. It may require a plunge, otherwise it just keeps bleeding.



The SP 500 seems likely to test the prior low at 741. We may get a legitimate double bottom. The overhead resistance will cap any purely technical bounces. That is how we will tell them apart.



The McClellan Oscillator is getting overextended to the downside.



This has 'plunge to a bottom' written on it. But we might just continue to slowly bleed.

Speculation Nation Part 2

Our national priorities favor financial engineering, financial speculation, consumption on credit.

They penalize manufacturing, savings, and the median wage of labor.

It could not be any clearer.


Financial Times
Hedge funds gain access to $200bn Fed aid
By Krishna Guha in Washington
December 20 2008 05:01

Hedge funds will be allowed to borrow from the Federal Reserve for the first time under a landmark $200bn programme intended to support consumer credit.

The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions.

The asset-backed securities to be funded under the programme are pools of credit card receivables, automobile loans and student loans.

The idea is to increase the supply of these loans and reduce borrowing rates by ensuring that the companies that make the loans can sell them on to investors who have guaranteed access to low-cost funding from the Fed.

The TALF is a key plank of the unorthodox strategy set out by the Fed last week as it cut interest rates virtually to zero. Washington insiders expect the programme will be dramatically expanded next year with further capital support from Treasury once the Obama administration takes office.

A senior official in the outgoing Bush administration told the Financial Times it could also be broadened to include new commercial and residential mortgage-backed securities.

The Fed thinks risk premiums or “spreads” for consumer loans are much higher than would be justified by likely default rates, even assuming a nasty recession.

It attributes this to a lack of buying interest in the secondary market where the loans are sold on to investors. By making loans to these investors on attractive terms it aims to increase market liquidity.

Making the scheme open to all US companies is a radical departure for the Fed, which normally supports financial market liquidity indirectly by ensuring banks have adequate liquidity to make loans to other investors.

However, the liquidity the Fed is providing to banks is not flowing through to financial markets, because banks are balance-sheet constrained and risk-averse. So it is channelling funds directly to investors.

The scheme is not designed specifically for hedge funds and a wide range of financial institutions are likely to participate.

Nonetheless, Fed officials hope that hedge funds will be among those investors that take advantage of the low-cost finance to drive down spreads.

The loans will be secured only against the securities and not the borrower. However, the Fed will lend slightly less than the value of the securities pledged as collateral. The Treasury has committed $20bn to cover potential losses.

Since the credit crisis erupted, hedge funds have complained that they cannot get the leverage they need to arbitrage away excessive spreads and meet high hurdle rates of return.

“Demand is there for leverage but not supply,” said Sylvan Chackman, head of global equity financing at Merrill Lynch.

In effect, the Fed will now take on the role of prime broker – the lead bank that lends to a hedge fund – for specific assets.