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Corn and Crude Convergence
Good article on corn this morning by Smart Money Europe (Zero Hedge link).
The bottom line is that corn is sitting at a two year high. Reading SME
you have to conclude there is more on the upside. I’m lifting this chart
from the piece to make a point:
I was looking at this (ugly) chart and realized this was the same chart
for crude. Now look at this chart that compares the two. (Note: I use
Brent as I think WTI is irrelevant)
This chart is truly ugly. Looking at this it hard not to conclude that Corn = Crude as far as directional price moves go. Which is the dog and which is the tail?
I think crude drives corn. It takes a bunch of energy to grow corn
(diesel and fertilizer). There is also the ethanol connection. The
higher the price of gas, the greater the price for ethanol, the greater
the price for corn.
The conclusion is that the dog (crude) is wagging the tail (corn). But that is not what the chart says. Over the past four months corn has outpaced oil. In the past quarter the tail has been wagging that dog.
One of two things will happen. Either corn corrects or crude corrects. My bet? The dog will catch up with the tail. This chart is telling me that $140 Brent is on the way.
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Americans are beating themselves up over $4-5 gasoline? Bwah, bwah, who could have possibly known that reliance on artificially low energy prices would be so damaging, when there is an uptick in crude prices?
Your fantasy world is ending...get used to it and by the way, welcome to the real world!
Jesus there are some miserable fucking people on this site. The reporting is awesome but some people just can't help throwing a rock at everyone. Go get laid or drink a bottle of jack or something!
The breaking point for the economy is here. Real inflation will hit Walmart by summer. With over 20% unemployment...oil staying over 100.00 will cause a sharp contraction in general consumer sentiment...and those numbers will hit just in time for Xmas.
By Xmas there is NO way the entities can manipulate the facts in the face of that.
good post. there's gotta be a breaking point for the economy as oil rises.
My interpretation of these charts is that they both represent highly speculative markets which are demonstrating failure at a double top. I believe both prices will trend down, essentially from here. The correlation is interesting; I don't put any interpretation on the time lag.
So we spend countless posts on discussing how JPM is manipulating the commodity silver...yet we accept other correlations between commodities as indicating trend.
These observations would have a lot more merrit if all commodities traded in a free market.
PM's are manipulated
Oil is manipulated (look up Goldman Sac's and ICE platform)
rumour has it folks playing long with copper and wheat.
etc etc.
PERHAPS's the correlations indicate just how controlled the markets are.
"PERHAPS's the correlations indicate just how controlled the markets are."
just wait until we start seeing price controls...
In the Congo people told me that in 1960 they bought a small car for a month's wage while now (1991) a day's wage wouldn't even pay for their bus ticket to work.
Soon coming to a place near you, except there probably won't be buses either...
I used to be able to pay for almost two government workers with my wage. Today I can barely eke out half a government workers wage.
"Pick any two commodities". I agree. Imagine what takes just to make payroll and keep the lights on within all the ubiquitous and varied trading entities, much less make the return expected plus profit.
"Pick any two commodities". I agree. Imagine what takes just to make payroll and keep the lights on within all the ubiquitous and varied trading entities, much less make the return expected plus profit.
does higher oil price means more corn will be "refined" into ethanol and lead to more demand for corn? that would explain the price convergence.
Yes it is called the Crude Corn ratio which when expressed for Bent and using continuous spot prices has just in the last two months risen from a low of 14.40 bushels of corn for a barrel of crude to just shy of 18 and has since fallen back to just under 16 bushels as corn has rebounded from the Fukushima low. So either you can buy Brent futures believing that they will catcch up to corn or you can buy Brent/Sell Corn in equal dollar amounts, with the idea the ratio goes up, ie that Brent becomes more expensive in terms of corn, which is essentially what you are arguing. If I had posting privileges I could put the chart of the ratio in here, but you can probably do it yourself. May Brent expires in about a week so you would probably want to do the trade using June Brent and July Corn, whioch trades at a ratio of 15.82 right now. A corn contract is worth $38,675 at the current price and a contract of Brent is worth $122,440. So you will need to sell 3 corn for every Brent contract bought as the ratio of the values is 3.165. You could get closer to parity if you can do more contracts. For instance you could sell 19 July Corn and buy 6 Brent Crude and get within a couple hundred dollars. Or you could try to use some etfs somewhere, but generally ETFs are garbage imho
Pick any two commodities (cotton, tin, corn, oil, gold, silver, ...) and you'll see the same correlation. Ersatz capital (lending by the Federal Reserve to de facto insolvent institutions) has driven real (private), liquid capital to seek other stores of value. Commodities may continue to rise until such time as the perception of continuing QE(n), n->inf, is curtailed. Why else would the Fed be jawboning that it might cut QE(2) short-- certainly not because of any stellar progress in employment ratios, certainly not because there is any other buyer of size looking for Treasury (toilet) paper.
that is why QE3 is not a slam dunk (at least not immediately following QE2.)
Now Ghaddafi is making the logical move, right out of Sun Tsu, and destroying his own oil fields and refineries. He doesn't have to "win" on any battlefield in order to triumph in the war - a few weeks, a few months of $5 gasoline and both the literal and metaphorical wheels come off for most of the West.
Europe isn't capable of managing a massage parlor, much less fighting an actual land war. They will utterly fuck this up and we will wind up caving.
If I were Khadaffi I wouldn't torch my own fields, I'd torch everybody elses, or better yet torch tankers, they're far softer targets and way harder to defend, the second that rebel tanker was free of the harbor I'd hit that first, then go after those giant CNG tankers, and youtube it.
I bet that's his plan anyway.
Why is WTI irrelvant (seriously I don't know)?
It reflects delivery at a pipeline nexus in the US, i.e. it can no longer freely move. Brent reflects tanker deliverable, Rotterdam IIRC, that you can then ship anywhere.
TY
YW
But surely the friendly canadians have a choice between feeding the pipes or a fleet of tankers?
Actually, they don't and that is part of why WTI is a discount and US refiners are loading up on Syncrude because they *can* refine it...
Thx for your insights. I have read the WTI discount argument before but (clearly) never really understood it. I can appreciate that the infrastructure might not be in place to handle the volume in question to make tankers an alternative to US bound pipelines (and hence force WTI to converge back to Brent in order to compete for production) but I guess it is work in progress:
http://www.advfn.com/news_UPDATE-China-In-Talks-On-Canadian-Oil-Rail-Can...
I also appreciate that US refiners have the knowledge (there most be non-US refineries with the necessary knowledge?) and have the infrastructure in place - but with a $12+ spread how long before investments are made, the Canadians would surely like to sell to highest bidder? Am I missing the obvious?
I read an estimate that the cost of arbing WTI Brent with Cushing oil is about $7.50 per bbl, the catch is that those holding the stocks are Cushing are going to make the spread on the refined products....
Gateway pipline
http://www.northerngateway.ca/content/northern-gateway-strategic-imperative-canada
Proposed but not built.... Monroe Doctrine might come into play.
There is a fair amount of talk in Calgary about the need to diversify our industry specifically in cultivating end users/customers specifically other than the United States. I've often wondered myself what will happen to our oil when the US dollar finally blows up and the Americans can't pay for oil on the open market. I don't think that they would hesitate for a second and "liberate" our oil & gas to prevent it's export to China or elsewhere.
No shit....
Well done as usual Bruce and just a comment: corn, while you are correct in the "tail" position, does lead a little as it's a derivative of advancing oil prices. The margins in both oil and corn "refining" are volatile to the upside when crude advances. Near current levels, other nasty interactions unfold: just as you say, to produce more corn--in size--makes for ever renewed calls on diesel and transport, etc. Yes, we are headed to 140 Brent. Just look at the Gasoil contract.
GG
That's very interesting, Glasgow. I assume you mean that, in terms of cycles, it is like the cosine wave leading the sine wave. The cosine is the derivative of the sine. So in that mathematical sense, corn leads oil.
That's very interesting, Glasgow. I assume you mean that, in terms of cycles, it is like the cosine wave leading the sine wave. The cosine is the derivative of the sine. So in that mathematical sense, corn leads oil.
I think you could just as well argue that Saudi plc is hoping for an crude price which maintain their purchasing power, so corn goes up oil goes up. They are closer to having a monopoly than any of the corn producers, but I appreciate the argument quickly becomes circular. In either case unless Ben stops the printing press I completely agree with your conclusion.
Obama told us to buy stocks 2 weeks before QE1 was announced. He told us to trade in our gas guzzlers yesterday. If Obama's past performance is an indicator, we're looking at $200 oil soon.
Not just $200 dollar oil, a $3/gallon po folks gas subsidy tax too.
^
He is perfectly suited to be a car salesman.
He is also perfectly suited (and eminately qualified) to be an empty suit.
+10
Trade in our gas guzzlers? What's that do for Government Motor's bottom line?
Interesting... but not surprising. The question to ponder is when high oil craps out the market. Brent at 100 euro and WTI at ~$125 is the wall or cliff depending on the metaphors you are partial to...
I would say the wall is higher....closer to $160 wti. People are certainly getting restless and fed up. Nothing they say can appease the masses when its hitting their pocketbooks. But when it does in fact show up in C component, it WILL be devastating to the gummint.
You may right...but 'tis better to be early than late. I plan on holding core positions and selling 1/3 or so of the energy exposure soon. Highest balance sheet leverage will be sold first....
corn and crude, stocks and metals, they ALL trade the same...excess liquidity is the biggest driver... see www.chartpoint.com 'Correlations' post from March 30.
If Wall street tanks it takes down the assets market world wide...You can say good bye to excess liquidity then! It's the killer....OIl-->Int rate hike-->WS/world wide asset dive-->global commodities dive-->global liquidity dry up-->Armageddon???
The conclusion is that the dog (crude) is wagging the tail (corn).
But corn is also a food staple and in an inflationary environment, you cut back on oil/gas before you cut back on corn (or it's substitutes).
Some very smart people are saying that rising commodity prices are simply a manifestation of the next bubble. It can't really be inflation they say because some things are going up in price (and at different rates) and some things (tech, cars, RE) aren't going up at all.
To me at least it seems obvious that Fed induced inflation shows up in equities: pretty much in real time, commodities: with a very small lag...if at all, things that use commodities as signifigant inputs: a much longer lag and in places where increased efficiencies are still greater than rising input costs (technology basically - areas where things like Moore's Law applies etc. like Ipads, TVs etc.)....perhaps no price inflation at all. No car price inflation either since demand is weak in part because of the price inflation of other goods that people need more.
Those "very smart people" just aren't very old, Mercury. The idea that "it can't be inflation because everything isn't going up at the same rate" is easily debunked, if you lived through the 1970's.
Monetary inflation doesn't negate supply/demand factors. It just distorts markets and nominal prices. In the 1970's, which I remember all too well, prices went up faster than wages. Much faster. Some prices (like fuel) went up much faster than the official CPI inflation rate, while others (like house prices) barely broke even.
House prices aren't going up with gold, oil and corn today because the banks are stuck with a 10 year supply, if you count all the NPLs that they haven't yet foreclosed on. On top of that, new home sales are only 20% of what they were at the peak of the real estate craze.
In a stagflation like today, as in the 1970s, money flows will determine which prices go up fastest. The Fed is firehosing money at stocks and bonds; the consumer is directing his garden hose at food and fuel. This fundamental dynamic can be tinkered with, but it won't be reversed. The only thing that can reverse it is to shut off the presses.
At which point both the markets and the economy collapse together.
let markets collaps and stop to consume-you will see how quick things will come back to the normal and even much better
Don't make me nervous, Bruce. Soon, it'll be time to say "Goodbye, my lovely Mercedes!"
$5-$6 gas, what are some good bike stocks?