It’s my week to vent – to express astonishment and perplexity at a number of markets and how they have behaved in recent days.
In some cases, I understand what drives markets and prices. In other cases, I am dismayed by what is going on. But I also accept the abstract idea, that’s what it is.
The cattle market
This week, canned beef prices hit new heights and hit levels never seen before. Canned beef is nothing more than various cuts of beef put in boxes to be shipped from a packer and packaging plant to retailers such as grocery stores.
From November 2014 to Spring 2015, the cattle and spot cattle futures traded from $ 168 to $ 172 respectively. But this week, as canned beef prices hit new record prices, cattle futures traded for less than $ 85 and cash cattle for $ 95 to $ 100.
In other words, in the current market, the packer buys cattle cheaply, but sells beef at record levels. So a huge amount of money is made in the cattle industry, but by the packers, not by the cattle producers.
I have never witnessed such a lopsided scenario. But that’s what it is.
The Stock Exchange Vs. Commodity markets
The stocks measured by the Dow Jones collapsed until about a month ago. Since then, the Dow Jones has risen more than 6,000 points and is up 35% in April, the best monthly performance in 82 years and down 16% from the all-time high set in early February.
And not a day goes by without Wall Street traders wringing their hands collectively over the poor performance of stocks, posting a 16% loss for the year.
However, the CRB index, which is in the commodity markets like the Dow Jones on the stock market, is 42% lower for this calendar year. The CRB index is weighted according to 19 raw materials: aluminum, cocoa, coffee, copper, corn, cotton, crude oil, gold, fuel oil, lean pigs, live cattle, natural gas, nickel, orange juice, reformulated mixture for the oxygenated gasoline, silver, soy, sugar and wheat mixture.
The bottom line with commodities is clear: they do a lot worse than stocks, stocks, the Dow, etc.
It is those who produce products of all kinds who are right to collectively wring their hands in the markets, not the Wall Street traders. But that’s what it is.
Crude oil and corn prices
The CRB index was so strongly criticized this month that it returned to levels never seen since the end of 1999 until the beginning of 2002. One of the main fundamental reasons for which the CRB drops so strongly is to because of crude oil.
An old adage in the world of hard asset markets is, “How crude goes, as do raw materials,” and that is the big problem that raw materials face. The collapse in crude oil values is driving most commodity markets into the red.
Here is a question to answer: what is the fate of corn prices with crude oil at levels never seen in history while at the same time the CRB index at a 19 to 20 year low?
From AgWeb.com, a headline: “As oil trades below $ 0, will corn or ethanol be next?” AgWeb goes on to say, “Monday’s oil trade was one of the history books. For the first time in history, oil traded below $ 0, proving that the risk of falling raw materials is not just $ 0. “
Corn prices over the years 1999 to 2002 averaged about $ 2.12 per bushel, but in 1999 the market fell to $ 1.96. Can history repeat itself, even if corn prices for the new 2020 crop are around $ 3.36?
Basically, I can build a case for corn from the new 2020 crop to end up falling to $ 2.70, give or take a little. But I doubt the corn could fall below $ 2 a bushel.
Crude oil prices have plummeted to the lowest levels in history, and the CRB index is now 18 or 20 years ago. Where were gas prices at the pump, ask yourself at the time?
From 1999 to 2002, gas at the pump averaged $ 1.37 per gallon. However, in February 1999, prices at the pump fell to 99 cents per gallon, with prices in St. Louis falling to 79 cents per gallon.
Big Oil doesn’t drop gas at the pump to save consumers money. The cattle packaging industry does not share the windfall profits with livestock producers.
It is a frustrating situation. But that’s what it is.
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