Wet June leaves hangover on Brazil coffee quality

by Agrimoney.com

Drier weather is to revive the pace of Brazil's coffee harvest, but will not make up for dents to quality that have already occurred from weather setbacks.

Somar, the crop consultancy, said that the South East and Centre West regions should this month "be much drier than June, with very few cases of rain.

"With the drier weather, the harvest will speed up," boosting conditions for export too, with rains a big setback to loading ships with sugar, as a commodity badly affected by moisture.

However, the rains of last month mean that the quality of beans may come in lower than the market has counted on from many areas, including parts of Minas Gerais, the top producing state.

Fungal attacks

The main damage from rain has come in the southern state of Parana and in the south of Sao Paolo, where excessive moisture and low levels of sunlight encouraging fungal infection, particularly on cherries in a relatively early stage of development.

The caused a "strong" decline in cherry quality, Somar said.

While conditions in Minas Gerais proved significantly more benign, in the south of this state too, wet weather accelerated maturation beyond ideal levels, meaning the quality of beans from this area might be lower than the market has factored in.

Brazil is the main producing country for arabica coffee beans.

'Cooled fears of crop failure'

Separately, Brazil's Conselho Nacional do Café producers' group also flagged wet weather in Vietnam, the top producing country of robusta coffee beans – although this moisture has been seen as positive for producers following an unduly dry spell.

The rains "cooled fears of significant crop failure in 2013-14 in the Asian country", the CNC said, noting the impact of the moisture in undermining robusta coffee futures, which last month fell in London to their lowest since October 2010, on a nearest-but-one contract basis.

The fall in prices nonetheless ignored the impact of the weak market in deterring growers in Vietnam and Indonesia, the second-ranked robusta producer, from selling robusta beans, the CNC added.

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Hogs react to PED rumors, while cattle looks for a bottom

By Rich Nelson

Hogs: There are rumors in the pork industry that PED has been found in North Carolina. As you know, North Carolina is the No. 2 hog state in the nation, after Iowa, and holds 13.8% of the U.S. inventory.

At this time, these rumors have not been confirmed. If true, this should not be a surprise. If PED follows other problems from the past, you should expect it to spread for another two or three months. So far, we cannot pinpoint any actual effect from PED on a nationwide slaughter number. There are simply too few findings compared with the almost 70,000 hog operations in the United States. Also, keep in mind PED is generally a piglet issue that should affect pigs weaned per litter numbers.

Before we can start talking about an actual net decline in nationwide PPL numbers you first must consider the March/May PPL was a large 2.2% increase over 2012. For now, you are only talking about taking down the growth in PPL before even considering a net decline. Keep in mind while we all know of someone with PED, or at least a friend of friend, your hog price is made from nationwide numbers. This is just like the mistake grain producers make with backyard marketing (making marketing decisions based on conditions in their particular area). So far on a nationwide basis, you are only talking about narrowing the growth that is happening in pork production.

Given the dramatic drop in feed costs already seen, and much more remaining into 2014, our only question is about how much to increase pork production estimates for next year. The discussion here is not marginalize the terrible problem shown on individual operations from PED. We need to look at this from a clear and realistic perspective, though.

Our official price viewpoint is that July and August are about priced right, October and December are only slightly overvalued, and that 2014 contracts may see moderate price declines. We are 100% hedged on all hogs to be marketed through August 2014…Rich Nelson

Cattle: Trading was seen in Kansas on Wednesday at $119. That was $1 lower than last week’s trade. That had little effect on the trade. Allendale looks for the cash cattle trade to post its summer low, which will be the low for the year, at any point in the next three weeks.

While the trade was lower we must also point out boxed beef is up 58 cents for choice and 1.48 for select so far this week through the midday report. For short term pricing many would question how $122 August futures reconcile with today’s $119 cash. Keep in mind in July basis can range from -$1 to -$2.90 depending on the week in July. August already has this priced in. In the later part of August, normal basis levels imply a $120 to $121 trade. We feel August is correctly priced. October futures, with normal basis applied, are pricing in cash at $123 at the end of the month. That is not much of a premium over the end of August cash.

Keep in mind the latest COF reports indicate a few extra cattle showing up at that time than normal. It will be Q4 (Nov and Dec) and Q1 where we can get excited. Not only do those periods have tight supplies and high prices to begin with, but it will be even tighter than normal. USDA’s Q1 estimate is for beef production is -6.1% from 2012. Cash cattle ended in February at $128.

On top of all this February 2013 discussion, it must be reported we had lower consumer demand due to sequester issues earlier this year. We do not find it too hard to suggest lower production in 2014, and slightly higher consumer demand, will push prices to $134 to $136…Rich Nelson

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Investing in Gold Bullion Is All About Timing—Here’s How to Do It Right

By Sasha Cekerevac

People always ask me about gold bullion. They want to know if it’s the right time to get back into gold bullion as an investment. While many other advisors are advocating a wholesale abandonment of gold bullion, I believe the time to buy is close.

Finding the proper entry point in the market is never easy, but there are several factors that combine to indicate an ideal investment opportunity. The first step to recognizing when the investment opportunity arises is to understand some gold bullion fundamentals.

While most people are aware that the retail public has been buying gold bullion in huge quantities (as seen by the record sales from the federal government through the U.S. Mint), they may not know about the profound demand from nations like India and China. And even that level of demand still has been far less than the amount of gold bullion sold by investors in exchange-traded funds (ETFs). With ETFs selling close to 600 metric tons so far in 2013, demand for gold bullion far outweighs supply.

Recent price action is indicating that a short-term bottom is close at hand. Price action is extremely important when it comes to determining how good an investment opportunity really is—whether for gold bullion or any other asset.

As an example, just a few days ago I wrote the article “Are You Missing a Great Investment Opportunity in Precious Metals?” in which I discussed the investment opportunity in platinum. While there will be a deficit for platinum, it’s important to watch the price action for indications that the price of platinum is getting close to a bottom—the most favorable investment opportunity.

At the time I wrote the article, the price for platinum was a $1,299.50. Just a couple days later, the price for platinum moved quite favorably—it’s now trading almost $100.00 higher.

Similarly, it’s important to watch the price action of gold bullion. While there is an investment opportunity, mistiming it could prove costly.

The chart for gold bullion from August 2012 to July 2013 is featured below:

Chart courtesy of www.StockCharts.com

Over the last few days, there have been very bullish moves in the price action of gold bullion. It appears, at least over the short term, that demand is now beginning to overcome the level of supply.

The horizontal lines on the chart above represent the Fibonacci retracement zones from high to low on the recent moves in gold bullion. For those skeptical of technical analysis, the Fibonacci calculations for the retracement areas have proven quite prescient, as noted by previous areas in which gold bullion temporarily halted its decline.

While there are still many long-term headwinds in store for gold bullion, it appears to me to be a good short-term investment opportunity right now. I would use these Fibonacci retracement areas as possible target zones for a move up, with a tight stop placed below.

Fundamentally, one bullish impact of the low price of gold bullion is that some miners will need to slow or stop production until the price of gold bullion becomes lower than the cost of production. That temporarily lowers supply, which will increase the price of gold bullion, even if demand remains the same.

We are entering a new dynamic for gold bullion, as the asset purchase program by the Federal Reserve is likely to end over the next year, which will prompt higher interest rates. Higher interest rates are negative for gold bullion in an environment of low inflation, since the cost to carry gold bullion increases. But we don’t know for sure when interest rates will rise or if inflation will remain low. Historically, the Fed has been behind the curve, and I think there is a chance that inflation will soon begin to accelerate much faster than people are expecting.

Over the short term, I do think that gold bullion might have hit bottom and could move up into the $1,400 to $1,500 area. At this point, the risk to reward as an investment opportunity for gold bullion looks favorable.

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As Portugal's yield curve flattens, Draghi is put on the spot once again

by SoberLook

Financial news junkies love the Eurozone. Just when things seem to quiet down, something always flares up in the region. This time around it is Portugal that has been grabbing the headlines.

The Economist: - NO ONE is likely to emerge a winner from the political disarray triggered in Portugal by the resignations of the finance and foreign ministers. For two years the country has won plaudits as the best behaved of peripheral Europe’s bailed-out countries. But voters have tired of the relentless austerity that Portugal has had to endure under the terms of its €78 billion bail-out programme, and the repercussions appear to have split the two-party coalition government. Portugal’s international creditors, the “troika” of the EU, the IMF and the European Central Bank, are seeing their star pupil brought low by the political and social costs of implementing their rescue plan.

CDS spread hit the high for the year - though nothing close to historical highs.

Source: DB (dates in European format)

And while the media has been focused on the 10-year bond yields spiking, the real action has been in the short end of the curve. The 2-year paper for example moved by some 150 bp in a matter of days.

Source: Investing.com

In fact the yield curve flattened in a manner reminiscent of the dark days of the Eurozone crisis (see post).

One of the concerns with respect to Portugal is that officially the nation may not qualify for the OMT support - the ECB's bond buying guarantee. That's because when the OMT program was announced (less than a year ago), it was aimed at nations that have not yet received the full bailout package from the EU/IMF (which Portugal has). The idea was to limit it to nations that still have "market access". And without the OMT backstop - which is expected to target the short end of the curve - Portugal's short-term paper is vulnerable, resulting in higher short-term yields. That will hurt Portugal's economy because now even shorter dated loans will become expensive (in spite of ECB's overnight rates at 0.5%).
The IMF has been pressuring  Mario Draghi to include Portugal in the OMT program for some time. The IMF is clearly concerned about having to provide additional support for Portugal (see post) and would rather see the ECB come to the rescue.

Bloomberg: - “Eligibility to the ECB’s Outright Monetary Transaction [OMT] program would also go some way in helping improve the monetary transmission mechanism [see post] in Portugal and secure durable market access,” the [IMF] said in a staff report about the seventh review of the aid program for Portugal.

Now the pressure is on the ECB to make an exception for Portugal. From the beginning analysts have said that Portugal should be the first candidate for the program (see discussion). However if the central bank does so, Greece may request the same support from the ECB as well, making the whole process politically tricky. The ECB certainly does not want to be buying Greek bonds at this juncture. Mario Draghi, who officially stated that Portugal will be excluded from the OMT (see post), is once again asked to solve structural and political problems that should not be the purview of an independent central bank.

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A Can’t Lose Deal… “Public” Venture Capital

By Chris

After the debacle that was Solyndra, we hoped that “public” venture capital would die a much deserved death. Alas, we once again underestimated the arrogance and self-professed intellectual superiority of the bureaucrats!

Well we, cynics of “public” venture capital (aka government sponsored business), should hide in shame. We obviously didn’t give enough credit to the great and powerful “Obama!” and his exceptional business knowledge (not to mention staying power), garnered of course from his vast experience in private industry.

Case in point – Tesla Motors

Call me old fashioned but I’m finding it hard to get enamoured with a car I can only run for about 200 miles before I have to “reset it”…yeah, plug it into a coal-fired power station. This is what “they” call “green” today. Way to go boys!

Yet, Tesla is the darling of Wall Street!

“But Chris, you don’t get it! Elon Musk is a genius, and this is the future.” Hmmmm, OK, go on… “Remember, you have to pay for growth, and Tesla is a growth company.”

Gee, thanks for explaining that, I feel much better now. And here I was, thinking that I’d seen this before…somewhere. Nope, it’s definitely different this time! You’re right Mr. Tesla cheerleader, there’s nothing eerily familiar, or scary, about what’s happening with this company. It is different.

Different how?

“Well, for starters we’re in a ‘new’ economy stupid.” Really? You mean an economy dependent on the FED’s insane QE continuing into eternity? An economy dependent on carbon credits, ZIRP, government bailouts, banking bail-ins, government loan guarantees, money flows, and hubris…lots of hubris.

Anyone trading the markets today must realise that valuations don’t matter. Revenues don’t matter. Pfft, get with the program already! Housewives and hair dressers of the world rejoice, fire up your E*Trade accounts and retake your seat at the day-trading merry-go-round. Buy some Tesla!

You see, the ingredients for success are much different today. Tesla has certainly nailed it in that regard. Between their US Department of Energy loans, which have reportedly been paid back, money Musk “borrowed” from the US tax payer ($465 Million), they then went BACK to the trough for another “undisclosed” amount. WTF?

The lesson here: Marketing works, especially when you have the right friends! Tesla obviously has phenomenal marketing prowess. I commend them for this…well done.

The reason for their success, outside of cheap loans from the public, has been their targeting of the high-end luxury market. This has worked because rich guys can and will pay for “cool”. Throw in a little bit of “it’s good for the planet” and you have a winning model, especially amongst Hollywood types!

Let’s face it, if you’re rolling in dough the price tag matters not. The trendier the better. After all, a new Tesla sports car for a guy like Charlie Sheen amounts to a week’s worth of his cocaine habit. And, after all, celebs need something to cart their adopted, ethnically-contrasting babies around just like the rest of us.

So, for you home bakers, here’s the recipe: A heaping teaspoon of government welfare checks, one good looking and well-spoken CEO, a few carbon credits, a gallon of QE-led credit boom, a couple of cute CNBC hostesses stirring the mixture and voila…success!

But let’s talk reality for those of us who still care.

Consider that Tesla sports a market cap of only US $13.6 Billion. Yes, that’s billion with a “B”. But don’t worry, it’s only trading at a forward P/E of 100. It’s still cheap as chips!

For comparisons sake, GM’s trailing P/E is 11.9, and Ford’s is 10.7. Mind you these are merely Johnny-come-lately wannabes, unlike Tesla, which by the way boasts an enviable EBITDA of NEGATIVE US $269 million!

“Come on Chris, you buzz kill! Lighten up, they’ll grow into that PE. Look at their revenues!”

Yeah, try again. US $945 million in revenues amounts to a rounding error on the balance sheet of GM. Unbelievably, Tesla’s market cap is fully 25% of GM’s market cap! Insanity reigns supreme.

Now, I can hear the Tesla cheerleaders…it’s deafening. “What about their first quarter profits of US $11 million? Well, as I read it there is roughly US $100 million in unsustainable line items in there, including US $68 million in carbon credits. Wipe out the Obama-mandated “loan” from the taxpayer and we’re staring at a giant, smoking hole in the balance sheet.

Tesla shareholders can also be comforted by the following: The Company guarantees that the residual value of their cars will be higher than any other luxury car on the market after 3 years. How do they know this? Well they don’t of course, but therein lies the difference between marketing and implementation. Mr. Musk will just go back to the taxpayer-funded trough, and his good pal Obama for more dosh if things don’t pan out…at least that’s been the precedent.

I haven’t even mentioned the obvious yet… Every other car maker in the world, to date, has been unsuccessful with their electric car initiatives. From the Chevy Volt to the Nissan Leaf…not to mention the Fisker, which was actually a pretty cool ride. They’ve all flopped.

Bottom line. Musk is a genius, he’s good looking, has a reassuring demeanor and in the end the economics don’t matter (nor do sales). After all, the money is free when you move in the right circles.

Parabolic? We know how this story usually ends…

Just look at this beautiful chart. What could possibly go wrong? Next stop the moon Alice!

TESLA is clearly a BUY!!! Don’t say I didn’t tell you so when the stock triples from here. (sarcasm intentional!)

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Say Hello to Inflation, Inflation is Dead

by ilene

(Featured in Market Shadows Newsletter, Fables and Fairy Tales. Also in the newsletter: A classic fable applied to investing, the selling of 4 puts, an indicator turning bullish, data on bond buying/selling, and more.)

Quantitative easing (QE or “money printing”) will continue despite Bernanke’s rhetoric about cutting back. (See Don’t Fear the Taper). Funding trillion dollar annual deficits requires monetization of debt. America is almost $17 trillion in debt. Interest rates rising just a few ticks closer to their long-term, normalized levels, would be an insurmountable strain on future budgets.

Admitting the true rate of inflation would trigger Cost of Living Adjustment (COLA) raises for government workers, pensioners and social security recipients. Private sector unionized labor and nonfederal government employees would likely demand raises too. Bond buyers would insist on higher coupon rates.

Our leaders have sacrificed integrity over fixing the underlying problems. Paul Price discusses the situation in Inflation Will Never Go Up Again. In his view, there is no plausible exit strategy from QE without risking societal breakdown as lifelong promises get broken (pensions, salary adjustments and social security payments). Civil uprisings have already occurred in Greece, Iceland and Cyprus. The masses are rebelling in Egypt today. The U.S. has avoided riots because QE is holding interest rates artificially low. The Bureau of Labor Statistics’ (BLS) manipulation of Consumer Price Index (CPI) allows the government to pretend inflation is not serious. When the public realizes the true extent of inflation, bond buyers will likely demand much higher coupon rates pushing up the government's cost of debt service dramatically.

Inflation Will Never Go Up Again

By Paul Price

Really? My health insurance premiums have skyrocketed. My kids’ pre-college and university tuitions have been ramping up. The cost of filling my gas tank has soared. Shiny new menus at restaurants mean higher prices - cash-strapped operators do not print them just to offer exciting new entrees.

Obamacare's implementation will make matters worse. Franchisees won't be able to absorb the added cost of healthcare coverage, or the $2,000 per worker penalty. This expense will be passed along as higher prices.

Despite these anecdotal experiences and predictions, the government’s Bureau of Labor Statistics (BLS) tells us each month that the Consumer Price Index (CPI) is barely above neutral year-over-year. It all comes down to how ‘inflation’ gets defined.

People generally think of annual inflation as the cost of a basket of goods and services today versus the cost of the identical basket one year earlier. While that makes sense, it is NOT what the BLS measures and reports.

If you want the details of the BLS report, read the fine print (below). The CPI-U is said to represent the index for all urban consumers.

Core CPI specifically excludes food and energy costs, reflecting reality only for people who don't move, eat or buy any products requiring transportation.

Rapidly rising income, property and sales taxes are not included in any of the BLS inflation numbers. Taxes add to the cost of living.

I traveled to Iceland last September. Part of that country’s post-2008 crisis management was the imposition of a 25.5% VAT (value added tax) on almost every retail purchase. Paying 25.5% in sales tax means each Krona can buy only 74.5% of the currency’s face value in real merchandise or services. Money unspent does not go towards paying VAT. But never spending money is the same as not having it.

Iceland imposed currency controls due to its banking industry failure. Citizens cannot move their wealth outside of the country; they cannot buy non-Kronur denominated securities without prior government approval. In practice, Icelanders will either pay the prohibitive 25.5% tax or forfeit spending their already-taxed earnings.

The same plan, with slightly lower rates, is in effect all over the Eurozone. When VAT rates move higher, inflation - defined as the cost of living - increases. (Imposing a national sales tax in the U.S. is a terrible idea. Taking money away from those who need it or could use it productively, and giving it to government, will allow politicians to do more damage. Deficits and spending won't drop.)

As an aside, ‘temporary’ taxes are rarely temporary. The June 29, 2013, Philadelphia Inquirer recounted the story of the Johnstown Flood Relief tax of 1936. A 10% surcharge on all alcoholic products was levied to help the townspeople. 76 years later the tax has risen to 18% and is built into all Pennsylvania liquor sales. None of it is earmarked for Johnstown. The hidden tax is part of the final retail price that then becomes subject to PA’s state level 6% sales tax. After compounding both taxes, the final cost is 19.08% at the register. The price of booze is not included in official inflation lists even though government policies may be driving us to drink.

Excluding food, energy and taxes from core CPI allows the BLS to understate increases in the true cost of living. After high inflation years in the late 1970s, the government changed how it calculated CPI. This happened again in 1990. Each time, the BLS manipulated the measurement techniques to downplay the extent of cost increases. This lessened the government’s need to increase Cost of Living Adjustment (COLA) applied to employees and retirees.

The excellent ShadowStats website provides monthly updates on what CPI would read if the rules were still the 1980 rules. The difference is startling.

Some BLS tricks are even more devious. 

The BLS uses other tricks to lower reported inflation rates. The ‘substitution principle’ says that when the price of a particular item, e.g. rib-eye steak, rises, consumers will switch to lower-priced alternatives like ground beef. Under that scenario a 20% rise in rib-eye steak prices disappears completely if it can be offset with ground beef costing 20% less. If Lexus or Porsche MSRP’s go up 30%, it doesn't matter because the consumer can buy a Kia or Hyundai instead. No inflation adjustment required.

Our leaders also call improvements in quality with unchanged pricing ‘deflationary’.  The first iPads were crude by today’s standards but cost $600. The newest iPad with Retina Display still costs $600 but packs more power and features. The BLS counts that as a drop in price even though the price is the same.

Until consumers are walking to work and eating cat food, the substitution principle allows the BLS to call CPI anything it wants.

A real-world consumer poll showed very large increases in the out-of-pocket cost of living over the period from Q1 2001 through Q1 2013. The official change in CPI is almost invisible over that same period.

Anyone who pays their electric, tuition or grocery bills, or funds their own health insurance plan, is painfully aware that the CPI and CPI-U numbers do not reflect reality.

The cost of living has been rising at a fast pace. Inflation, as measured by the CPI, will never go up significantly unless politicians abandon their deceptive practices.  Unfortunately, Washington D.C. has a strong interest in keeping the public uninformed.

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