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Making Sense of Commodities


Fertilizer a key part of equation.

Short Energy

So far in 2008, the United States Oil Fund (USO) has seen short interest rise 140% or two times the total float. Powershares DB Commodity Index (DBC) has watched its short interest climb more than 500% this year. According to Morgan Stanley the average short interest among US listed ETF's is 10%.

I will alert Minyans when Congressional hearings are scheduled about this other form of speculation that includes windfall losses.

As for the market, the largest institutions apparently are equally hopeful, for their relative performance sakes, that this just can't be since according to some reports I've seen they are about 500 basis points UNDER-weight Energy.

I'd imagine both will continue to be long of shaking heads.

Commodities, Commodities

My weekend reading included a report from a commodity research service that was written for producers and manufacturers who need to figure out how and when to buy/hedge the raw crops or livestock.

I'll share with you the one sentence from several pages that may best sum up what's going on. And I'll share, they're objective and even had to swing from being quite bearish short term (which I personally have disagreed with and shared in MV), upon new data they chose not to fight.

When describing the corn crop, so central to so many products downstream, the article says nothing of politics and world views. It describes what it will take to make up lost ground from an already under-planted crop, with reduced yield projection and now flooded in key areas: "It will take a miracle."

And I'll say – it will take a lot more fertilizer afterwards.

If I had to guess this will result in rationing before it's over. And a lot higher prices on the free market if that isn't flooded too.

P.S. To slay one more myth that secular bull markets have a good track record doing, it turns out commodities do not just go up because of a weaker dollar. But an overlooked possibility from my perch is a group painfully stuck between a stronger dollar and higher commodity prices – Consumer Staples.

Cost of Food and Friendship

My friend, a grains broker e-mails me the following:

"A lot of feeders, dairies, poultry, etc buy their feed needs 6-12 months forward. So through most of this rally there are several companies all across the country that really have not had to pay these high prices because they had feed booked so they have not felt the pain yet.

There has been no real opportunity to buy any cheap feed or grain for next year, and I just don't see how its going to work. Feeding animals is going to be a losing proposition next year unless something drastic happens. If I try and book feed for most of my customers for next year they would be locking in losses not a real exciting proposition on their end

Last time I was at his house we had some good Texas BBQ. Next time, as I chewed on here, it's going to cost him a lot more unless he wants to hedge our friendship.
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Positions in energy, futures, equities, corn futures, fertilizer stocks, some consumer staples stocks.
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