Rapid rise in ethanol prices reflects logistical problems

U.S. Energy Information Administration 

Ethanol spot prices have increased steadily since early February. By late March, New York Harbor (NYH) spot ethanol prices exceeded prices for RBOB (the petroleum component of gasoline) by more than $1 per gallon (Figure 1). Ethanol spot prices in Chicago and Gulf Coast markets also rose above NYH RBOB prices. The premium of NYH over Chicago spot ethanol prices, which had averaged roughly 25 cents per gallon in January, close to the typical transportation costs of moving ethanol from production centers in the Midwest to terminals on the East Coast in recent years, widened to $1 per gallon in early March. Logistical constraints in and around ethanol production centers in the Midwest, mainly involving railroads on which approximately 70% of ethanol is shipped, appear to be a key factor driving recent prices. Ethanol futures prices suggest that market participants expect the recent price increase to be short-lived. The Chicago Board of Trade (CBOT) ethanol futures curve is heavily backwardated, meaning near-term contracts are selling at a premium to longer-term contracts. On March 31, the futures contract price for May 2014 delivery was more than $1 per gallon below the Chicago spot price for immediate delivery. Rail system conditions appear to be improving. In addition, the recent ethanol price increase has driven ethanol operating margins and crush spreads to their highest values in recent years, providing a strong incentive for increased ethanol production rates over the coming weeks.

Extremely cold temperatures this winter led to rail congestion in and out of Midwestern terminals that delayed shipments to other regions and resulted in significant ethanol stock draws. Railcar dwell times, the time loaded railcars spend in a terminal awaiting movement, at Burlington Northern Santa Fe Corporation's Galesburg, Illinois terminal, which handles many ethanol cars from Iowa, nearly doubled in early 2014 to reach a peak of 60 hours in February and remain above year-ago levels (Figure 2). While over 70% of ethanol producers are equipped to load unit trains, only about 35% of gasoline blending terminals are equipped to receive them. The average speed of manifest trains, which include cars carrying different products and are often used to deliver ethanol to gasoline blending terminals that are not equipped to handle unit trains, decreased by 20%, from 22 miles per hour (mph) to 17 mph, over the past 12 months. Ethanol stocks were drawn down nationwide by nearly 2 million barrels (bbl) from mid-February to mid-March, partially recovering to 15.9 million bbl on March 28. This is more than 4 million bbl below typical March levels, which averaged more than 20 million bbl from 2011 through 2013. East Coast inventories (Figure 3) were especially hard hit and on March 14 reached their lowest level (4.5 million bbl) since EIA began recording data in June 2010.

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This “Wealth Indicator” is sending a rare signal!

by Chris Kimble

CLICK ON CHART TO ENLARGE Beauty is in the eye of the beholder and boy does this apply to the art market! Speaking of the art market, Sotheby's has been a good indicator for times to buy or sell the S&P 500 over the past 16-years. At this time Sotheby's is hitting a price level where it peaked and the S&P 500 happened to run out of steam. Is this "Wealth Indicator" sending an accurate signal to stock investors or is it different this time?

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Commodity Chief Blythe Masters to Leave JPMorgan Chase

By JESSICA SILVER-GREENBERG

April 2, 2014, 1:34 pm Joe Amon/The Denver PostBlythe Masters, head of the JPMorgan Chase commodities business. A prominent executive is leaving JPMorgan Chase as her powerful trading operation has stopped performing up to expectations, underscoring that Chase, the nation’s largest bank, is not immune to the boom and bust cycles that periodically sweep through Wall Street. The departure of Blythe Masters, the head of JPMorgan’s giant commodities unit, comes as the bank completes a sale of crucial parts of that business. Commodities operations, which trade in things like oil, metals and electricity, have recently stumbled at several Wall Street companies. But JPMorgan’s partial retreat from the business is particularly noteworthy because the bank, under Ms. Masters, made ambitious efforts to increase its presence in commodities soon after the financial crisis. New regulations, greater competition and relatively stable commodities prices have combined in recent years to make the business far less profitable for big banks. JPMorgan is selling its physical commodities business, which trades hard assets, as opposed to the financial instruments that are tied to commodities, to the Mercuria Energy Group of Switzerland for $3.5 billion in cash. The firm, started by two Goldman Sachs traders, does not have to follow the United States regulations that aim to make banks like JPMorgan less risky. The announcement on Wednesday comes after another loss for JPMorgan. Last week, Michael Cavanagh, a top lieutenant to the bank’s chief executive, Jamie Dimon, said he would leave the bank for the Carlyle group, a private equity company. The departure of Ms. Masters closes a chapter in one of the most closely followed careers on Wall Street. She joined JPMorgan as a college intern almost 30 years ago and rapidly rose to its upper echelons. When she was 28, she became the youngest managing director the bank had had. She gained particular prominence for helping to pioneer credit default swaps, the financial instruments that later helped stoke the mortgage crisis. Addressing that issue in 2008, Ms. Masters said in a speech, “Unfortunately, tools that transfer risk can also increase systemic risk if major counterparties fail to manage their own risk exposures properly.” Privately, Ms. Masters has noted that she never built or worked with mortgage derivatives, people close to her said. Since joining the firm in 1991 after college, she has held several roles, including chief financial officer of the investment bank. With the firm backing of Mr. Dimon, Ms. Masters took over the commodities unit in 2007. But she attracted scrutiny there. Last spring, Ms. Masters was mentioned in an investigation by the Federal Energy Regulatory Commission into accusations of illegal trading in the California and Michigan electricity markets. Manuel Balce Ceneta/Associated PressBlythe Masters of JPMorgan Chase at a Senate panel in 2009. Investigators for the regulator found that JPMorgan had designed trading “schemes” that converted “money-losing power plants into powerful profit centers,” according to a commission document reviewed by The New York Times. In that preliminary document, investigators took aim at Ms. Masters, saying she had made “false and misleading statements” under oath. From the outset, JPMorgan vociferously defended Ms. Masters, saying that neither she nor any other employee had lied or acted inappropriately. The bank ultimately reached a $410 million settlement with the agency, which never brought a separate action against Ms. Masters, who oversaw energy traders in Houston in her role as commodities chief. Within the bank, the accusations against Ms. Masters, who had forged strong ties with Mr. Dimon, were met with a mixture of outrage and disbelief, according to people briefed on the matter, who spoke on the condition they not be named because they were not authorized to discuss the matter. The overwhelming feeling, they said, was that Ms. Masters was unfairly singled out by investigators at an agency that was looking to flex its enforcement muscle. Still, the accusations, which surfaced last spring in a confidential commission document reviewed by The Times, cast a long shadow as Ms. Masters brokered the sale of the bank’s physical commodities unit. To ensure that the sale to Mercuria goes smoothly, Ms. Masters will remain at JPMorgan for the next few months, according to an internal bank memo circulated on Wednesday. It is important to Ms. Masters, the people briefed on the matter said, that as many employees as possible make the jump to Mercuria. JPMorgan announced its intention to sell the business last summer, meeting at the time with other suitors, including Macquarie, but settling on Mercuria. In the memo announcing her departure, Daniel Pinto, head of the corporate and investment bank, and Mr. Dimon said Ms. Masters intended to “take some well-deserved time off.” JPMorgan will still trade financial contracts tied to commodities, a business that is less likely to be hit by new regulations. Regulators have become skittish about banks’ trading in physical commodities, partly because it exposes them to expensive risks. For example, a bank might be overwhelmed by the costs of cleaning up an oil spill caused by a physical operation that it owns. In a securities filing, JPMorgan said its commodities activities carried “the risk of unforeseen and catastrophic events, including natural disasters, leaks, spills, explosions, release of toxic substances, fires, accidents on land and at sea, wars, and terrorist attacks.” New capital rules have also made it harder to earn an attractive return on commodities trading. JPMorgan has not reported earnings from its commodities unit separately. But the assets it is selling do not appear to have been particularly profitable in recent months. JPMorgan said the sale would not have a material effect on earnings, suggesting that the assets were not making enough profit to make a difference in the bank’s overall results. JPMorgan’s management certainly did not expect the commodities business to falter when they piled into it in 2010. “When all our efforts are completely integrated and are running at full capacity, profits of this business will grow even more strongly. And this should happen in the next two to three years,” Mr. Dimon wrote in the bank’s 2010 annual report.

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Are You Prepared for the Coming Stock Market Crash?

by Bill Bonner

Excess Liquidity The Dow rose 74 points on Tuesday. Gold dropped $3 an ounce. What do you expect? Tuesday was April Fools’ Day. This should be a good quarter for stocks, according to economist Richard Duncan. He believes “excess liquidity” – cash and credit in excess of what borrowers and spenders actually need – drives asset prices. We haven’t been able to connect every tarsal, hallux and tibia of Duncan’s theory. But the skeleton, as he presents it, is serviceable … even attractive. The more excess liquidity, the more people use it to bid up asset prices. As excess liquidity goes down, so do asset prices – particularly stocks. A Change in Outlook Duncan expects the coming quarter to produce a record of excess liquidity. The Fed is still pumping liquidity into the market at the rate of $65 billion every month. Meanwhile, it is tax time, so the government’s needs for borrowing will be relatively low. And according to Duncan, the difference between the available liquidity and the need for it in the regular economy has to go somewhere. But after this quarter, the outlook changes. The Fed is scheduled to wind down QE by the end of the year. And the federal government’s rosy budget scenario will begin to fade – meaning more government borrowing. That means the third quarter is expected to produce only a slightly positive excess of liquidity. And in the fourth quarter, says Duncan, the excess turns into a shortage. If the Fed persists in its plans to taper QE, in other words, the third quarter will likely see a sell-off in the US stock market. This will give the Fed’s forward guidance a kick in the rearward quarters. Instead of continuing to taper, the Fed will panic. Its entire theory of life… its philosophy… and its sacred religion will be challenged. In its view, credit, prices and stocks must ALWAYS go up. Mission Creep There was a time when the Fed was merely charged with making sure the value of the nation’s money was stable. It failed miserably. So it was rewarded with more responsibility. Its mission creeped toward making sure the nation had full employment. At that, too, it fails regularly. So, now it has taken upon itself (Congress never authorized it) to hold interest rates down and push consumer prices up. Actual consumers prefer lower, not higher, prices. But such is the hubris of central bankers that they are willing to contradict 100 million households. They insist on dollar earners and savers losing about 2% a year of their buying power. As we have been saying, it is an odd recovery that leaves the average American with less income than he had before it began. But it is an odd recovery that we have. Stock prices – not to mention prices for antique guitars and gaudy modern “art” – have soared. Incomes, meanwhile, have limped downward. This leaves the typical American feeling richer… but with less money in the bank. Here Comes QE 4 At $81 trillion, total US household wealth has never been higher. But it is supported by precious little household income. Duncan tells us the ratio of household disposable income to household wealth is important. That’s because wealth must be supported by income … or it disappears. This is exactly what happened – twice – in the last 15 years. From 1952 until the 1990s, the ratio of household wealth to disposable income was fairly stable – at about 525%. Then it rose above 600% – on two occasions. At the end of the 1990s, before the dot-com crash. And in 2006-07, before the global financial crisis. Today, once again, the ratio is above 600% – for only the third time in history. And once again, we should be prepared for a crash – or at least a substantial bear market – in US stocks. That will probably happen in the third or fourth quarter of this year. And it will probably be followed by an announcement by the Fed that, instead of taking QE off the table, it will continue the program. And instead of allowing short-term rats to rise six months after QE ends, as Janet Yellen suggested in her recent post-FOMC press conference blooper, the target rate will stay at zero for this year … and all of 2015, too. Duncan believes “QE 4″ will produce the same results as QE 1, 2 and 3: It will send stocks flying again. If so, we could be looking at another big run-up in the stock market … after, of course, a substantial decline. Our advice: Get out of the US stock market now. This market is manipulated, overpriced and dangerous.

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Push For Venetian Independence – the State Strikes Back

by Pater Tenebrarum

A Bizarre Turn How do you get rid of people whom the State disapproves of? Apparently, these days the answer is increasingly to simply label them 'terrorists'. Few people invite more disapproval than secessionists. Once a region splits from a state, that state loses territory, and more importantly, a slice of population that can be looted. We wrote last week about the secessionist movements springing up in Europe, after an 89% majority in Venice voted for secession from Italy in a 'non-binding' referendum (the reason why it was non-binding was of course that the central government wouldn't approve of such a referendum). The Veneto region has a very good reason to want to get away from Rome's clutches: cold, hard cash. It is one of the regions paying a lot more to Rome than it gets back, because its economy happens to be doing much better than the perennially backward and thoroughly corrupt South, where in several regions the mafia continues to rule the roost (e.g. in Calabria, where the 'Ndrangheta mafia family last year made more than McDonald's and Deutsche Bank combined. We mentioned its diligent siphoning off of EU subsidies previously). Pope Francis may think it is enough to ask the mafia families to 'stop doing evil', but the people of Venice have a better plan. Just wave good-bye to them. However, a number of people behind the independence movement have just been turned into something worse than the mafia: according to Italy's government, they are 'terrorists', who  -gasp! – even built their own home-made tank out of an old tractor! We kid you not. Meet the Venetian Terrorists and their Tank The Telegraph reports that 24 people, including a former parliamentarian, were arrested for an alleged 'terrorist  plot'. While this story is utterly absurd on the one hand, it also in a way unmasks the true nature of the State: “Italian police on Wednesday arrested 24 people involved in a campaign to demand independence for Venice and its surrounding region and seized a tractor that they said the activists had tried to convert into a sort of tank. The surprise arrests came just two weeks after activists held an online vote calling for the Veneto region, which encompasses the lagoon city, to break away from the rest of Italy and declare itself the "Repubblica Veneta". The authorities accused the 24 separatists of being involved in "terrorism", "fabrication of weapons of war" and "subversion of the democratic order". The activists were part of a "secessionist group that was planning various initiatives, some of them violent, aimed at pushing for the independence of Veneto and other parts of the national territory of the Italian State," the paramilitary Carabinieri said.” The activists were allegedly planning to use the "tank", which was armed with a makeshift cannon, to stage a protest in Venice's St Mark's Square, 17 years after a similar stunt in which Veneto separatists drove a home-made armored car into the famous square. Police claim the makeshift tank was in good working order and was capable of firing projectiles from its barrel. Those arrested included Franco Rocchetta, a former MP and the founder of the Liga Veneta, or Veneto League, one of several separatist movements calling for independence for the affluent north-eastern region.” It is perhaps also noteworthy that among those arrested were reportedly two organizers of the so-called "Pitchfork Protests" that sprang up last December and whose declared goal was the ousting of the entire Italian political class. Here is the scary 'weapon of war' with which they would have allegedly overthrown Italy's democratic order, had they not been stopped in the nick of  time: The big scary 'tank' of the Venetian 'terrorists' (Photo via AP / Author unknown) Clearly, Italy's ruling class could not idly stand by while such a huge threat was manufactured in a shed in the Veneto.  We wonder though how exactly the separatists hoped to overcome the Italian army with it. The only possibility we can think of is that they thought the soldiers would simply faint when confronted with this scary monster tractor. The arrests followed on the heels of Venetian pro-independence groups taking concrete steps to initiate the region's secession: “The crackdown comes days after politicians in Veneto started formal proceedings toward independence, despite constitutional prohibitions. Prosecutors allege that the violent secessionists were seeking a two-pronged approach of violence alongside consensus-building.” We would suggest that the Italian authorities are far more concerned about the 'consensus-building' part than the alleged plan to initiate violence. One only needs to keep in mind here that the consensus has already been built, while there has actually been zero violence thus far. The allegation that violent actions were planned strikes us as a pretext to get rid of the movement's main organizers. It is as though the carabinieri have become a version of the 'pre-crime' division from P.K. Dick's 'Minority Report'. The separatists built a 'tank' (that looks like an oversized child's toy), so they must have thought about violence – that's a good enough reason to put them into the slammer! It is also interesting that secession is deemed 'unconstitutional', which really means only one thing: if people advocate secession, the State reserves the right to employ violence against them, as it has indeed just done by arresting and incarcerating the Venetian separatists. Nevertheless, we think it is really a rearguard battle and one the State will ultimately lose.  These days, peoples'  willingness to dance to tune written by the ruling elites seems greatly diminished in a growing number of places. How much longer before they begin to question the State qua State?

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Why Was China Carrying Gold?

by Keith Weiner

Why Was China Carrying Gold? Zero Hedge has run anexcellent article explaining the use of commodities, beginning with copper, to work around the Chinese government’s imposed capital controls[1]. Capital controls are intended to prevent arbitrage between the dollar interest rate and the yuan interest rate, which is much higher.To keep this gap open, and prevent the arbitrage—aka hot money—they have a choice to shut off trade with the outside world as North Korea does, or resort to capital controls. The basic idea of capital controls is that the government thinks it can tell the difference between “good” and “bad” types of money moving in or out. As we’ll see below, arbitragers are clever and will do whatever it takes to make their transactions look like the “good” kind. I describe one scheme used to work around Chinese capital controls, below. It’s complicated, and the details are a bit murky. I may even get them slightly wrong, but I am trying to paint the big picture in clear terms. A Chinese company gets a letter of credit from a bank. With that in hand, it buys a quantity of copper. The copper is keptoffshore or in a bonded warehouse, so there are no duties paid to import it. The company promptly sells it to its offshore subsidiary. The offshore subsidiary is not under the capital controls of the Chinese government, and so it’s able to borrow dollars cheaply. The offshore subsidiary pays its parent for the metal. Now the parent has dirt-cheap dollars on shore. The parent then takes exchanges those dollars for yuan. The company has onshore yuan, but is paying the dollar interest rate. The offshore subsidiary is now sitting there in possession of copper. Of course, the company does not want to take the risk of a falling copper price. So they sell a futures contract. Many analysts and commentators use scare quotes around the word “hedging”.  The implied question is: why in the world would anyone want to own a valuable commodity like copper and hedge it?! There are two reasons. First, their balance sheet is denominated in yuan. If they buy something and its price as measured in yuan drops, they take a loss. It’s just like if you bought gold at $1800 and sold it at $1300. You could have kept the same gold, but instead you sold it and lost $500 in the buying and selling. When you use credit, you can be forced to sell even if you might otherwise want to hold on. Second, there is typically a contango in commodities markets. That is, there is a positive spread between the spot price and futures contract price. For example, the Chinese company might have paid $3.30 per pound to buy the copper metal and simultaneously got $3.35by selling a future that matures 6 months later. This 5-cent spread allows them to earn a small profit to carry the copper. I use the term carry quite deliberately, because they are warehousing it without really owning it. In 6 months they will deliver the copper (or potentially, roll the future to a farther-out date if desired). Notice that there are two other spreads this company is straddling. It is long yuan and short dollars. If the dollar falls relative to the yuan (which it has until recently) this is another source of profit. Finally, the very purpose of this was to straddle the yuan-dollar interest rate spread. If the cost to borrow for 6 months in yuan is higher than the cost in dollars (it has been and still is) then the company is profiting, in the sense that its cost of capital is lower than its competitors. That is true, unless its competitors get in on the game also. By its very nature, this kind of game becomes very popular very quickly. Now, the Chinese government may be cracking down on this. If they want to do that, they will have to rewrite their regulations to block this as a “bad” form of money flows. The new rules will work until financiers can develop the next workaround. The only surefire way to block unwanted but highly profitable activities is to block everything. Chinese companies have been playing this game using copper for quite some time. More recently, they have been using other commodities including gold. This chart from Sharelynx shows a dramatic increase in imports into Hong Kong from China starting in late 2011, which suggests when they began to use gold.[2] As with copper, they are using a commodity as a convenient way to work around an obstacle imposed by their government. They just want to borrow at the best interest rate. Gold works even better than copper, especially as it may have a more reliable contango once you get past the front-month. The fact of temporary backwardation is an added kicker. If the front-month goes into or near backwardation, the market offers you a profit when you need to roll to a contract farther out – click to enlarge. I would discourage everyonefrom making too much out of the Chinese gold carry trade. It’s not a giant conspiracy to buy up all the gold, while suppressing the price. It is not some farsighted plan to anticipate the collapse of the dollar by owning hard assets. Those who use credit to buy gold there are subject to the same challenges as those who do it here in the West. When the gold price drops, they are in a world of hurt unless they have hedged. With the yuan rising about 14% against the dollar from 2010 until the trend broke in February, the Chinese experienced an even bigger drop in the gold price than did Americans. In August 2011, the gold price peaked over 12,000  yuan. At the end of 2013,  it had dropped to 7200. It fell by 40%.  It’s a serious bear market for them, indeed. Why in the world would anyone want to own something that’s falling  (as they reckon it) so far? And they do reckon it in yuan, just as Americans reckon it in dollars.  For the same reasons.  We’ve all been trained that all economic values are measured in dollars, and we keep the faith even when we know that the dollar or yuan or any paper currency stretches like a rubber band. We know that the dollar is manifestly unsuited to measuring value, especially over longer periods of time. In any case, you can’t buy something that’s falling using borrowed money, not for very long. These Chinese companies don’t own that gold. They are carrying it. They can’t keep it. Another term for carrying is warehousing.  They are warehousing it.  The buyer of that futures contract is the owner, though in most cases he’s just a speculator betting on the gold price using leverage. He hasn’t got the cash to take delivery. As I discuss regularly in the Supply and Demand Report,  it’s not a bullish signal for the gold price if the marginal use for the metal is to go into warehouses.  In other words, the marginal buyer is a speculator trying to front-run hoarding demand. Eventually the speculator runs out of credit (willingness, if not access) and the price rally peters out. Then the warehouse is no longer the marginal demand. It becomes the marginal supply. The carry trades unwind.  Mechanically,  this is:  sell metal and buy a future. That would push the basis upwards. In fact, that has been happening in the gold market. This new trend is quite different from the typical state, post 2008, for which I have coined the term temporary backwardation. Here is a graph showing the April and June gold contracts. The action is most pronounced in the April contract, but June is moving in the same direction. Is it due to Chinese firms being forced (either by regulators or credit conditions) to unwind their carry trades? – click to enlarge.

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