Runaway Inflation in...Chicken Wings?

The New York Times reports that chicken wing prices are - pardon me - flying high!

Reason being, restaurants have cut back on their orders for higher priced chicken breasts in favor of wings, which are more perceived as a "cheap luxury", according to the article.

Higher demand, coupled with falling supply...you know what that means - higher prices!

In the interest of full disclosure, I must reveal that I actually have wing royalty in my blood - Drew Cerza, the Buffalo Wing King, and founder of the Buffalo Wing Festival (pictured next to Bobby Flay above), is my uncle. I have not yet connected with Uncle Drew for the inside story on the price boom in chicken wings - but when I do, you'll be the first to know, dear reader!

Perhaps its time for us to look into a futures exchange for wings...imagine what'll happen when the Chinese have their first bite! They're already crazy for KFC...imagine what a real wing with some Frank's red hot sauce dripping off it will do...mmmmm...

Hat tip to my buddy, wine expert, and honorary Buffalonian Doug for sending this piece along.

Why Agriculture Prices Have Held Up Remarkably Well

A recent piece in The Economist highlighted the recent strength of agriculture prices in the face of the downturn, and the reason for it.

Though prices of the meats, grains, and softs are still off their 2008 highs - they're not off by much anymore - as commodities such as cotton, soybeans, and sugar are starting to rally in a big way. 

How could this be?  Aren't we in a Depression?  Perhaps, but supply has come offline in a big way, while demand has remained strong.  As the Economist piece points out: "No matter how bad things get, people still need to eat."

It's looking like, though there were many bubbles in 2008, China's food consumption was not one of them.  Back to the article, with some staggering numbers:

China’s role has been profound, reflecting its enormous economic progress and huge population. In the past decade, says Carlo Caiani of Caiani & Company, an investment-advisory firm based in Melbourne, the consumption of milk has grown seven-fold, and that of olive oil six-fold. China is consuming twice as much vegetable oil (instead of less healthy pork fat), 60% more poultry, 30% more beef and 25% more wheat, and these are merely the obvious foods. Scores of niches have expanded dramatically: people are drinking four times as much wine, for example.

And yet even with all this growth, people in China still, on average, consume only one-third as much milk and meat as people in wealthy countries such as Australia, America and Britain. The gap is even larger with India, which is also growing fast. Overall, protein intake in Europe and America is unlikely to expand much, but a combination of rising incomes and population in developing countries could increase demand by more than 5% annually for years to come. “Once people are accustomed to eating more protein, they won’t take it out of their diet,” says Mr Caiani.

And remember, many food stock levels are at historic lows.  Unless new supply comes online soon - and I don't know where that supply is going to come from - we could be in for a whale of a rally in food.

Read the full article in The Economist...

Further reading about investment opportunities in agriculture:

• Soft Commodities are Starting to Scream: "Inflation!"
• Sugar Futures Rally, OJ Takes a Breather
• Time to Invest in Orange Juice?

Food Shortages Discussed at G8 Summit

On Saturday, agricultural ministers from the world's (roughly) eight most industrialized nations, met in Italy to discuss the looming threat of food shortages and a global food crisis.

America's agricultural secretary warned that unless many countries take substantative steps to increase food production, there will be increasing shortages and social unrest around the world.

For more details, you can click here to listen to Stratfor's short podcast summary of the event.

Are you also skeptical these world improvers will be able to have their way?  Me too - and I think the day will soon come again when us "evil speculators" can profit from skyrocketing food prices...muhahahahaha.

Current Commodity Futures Positions - 7/13/08

Another tough one - got to put it in the past, though. Facts are, this system works great when futures are going up, and not so great when they are going sideways/down. And lately, I just haven't been in the particular futures that are going up (oil looked nuts at $110 - who would have thoughts we'd see almost $150 so soon!)

Live Cattle Futures
Keeping the faith - I've been stopped out of most of my live cattle positions. Still like these a lot in the medium/long term, but have to respect the market. Will look to build these up again on strength. These were slightly disappointing, but I may have gotten into these a bit too late.

Sugar Futures
Oil has gone up 12x, from $12 to $144, over the last 10 years. Sugar is sitting at 13 cents, up from a multi-decade low of 5 cents. It's going higher, much higher, at some point in the next 5-10 years.

Cotton Futures
What a giant turd cotton has been for the last two years! Still, I think this turd will have it's day. Who the hell is still planting cotton with $7 corn and $15 beans???

Open Positions

Date Position Qty Month/Yr Contract Strike Call/Put Entry Price Last Price Profit/Loss Market Value Action 06/17/08 Long 1 DEC 08 Cotton 82.20 73.65 ($4,275.00) 06/19/08 Long 1 FEB 09 Live Cattle 116.200 112.500 ($1,480.00) 06/18/08 Long 1 OCT 08 Sugar #11 12.88 13.97 $1,220.80 07/01/08 Long 1 OCT 08 Sugar #11 13.90 13.97 $78.40 Net Profit/Loss On Open Positions: ($4,455.80)

Account Balances
Current Cash Balance	$85,756.63
Open Trade Equity	($4,455.80)
Total Equity	$81,300.83
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$81,300.83

Cashed out: $15,000.00
Total value: $96,300.83

Weekly return: -7.5%
YTD return: 22.6%

***BTW, I usually "cash out" money just to pay for taxes, rent, and cheap beer. So total value is all pre-tax.

Current Commodity Futures Positions - 7/06/08

Well not a great week - disappointed in cotton especially, and coffee to end the week. A few thoughts on the positions:

Cotton Futures
Cotton broke sharply to the downside, as I managed to pin the tail on the local top. However I believe the downside here is limited, so I'm planning to hang on for a bit. Let's face facts - lowest level of cotton acreage in 25 years. It is going to $1+, just a matter of when. And with the Dec contract sitting at 75 cents, I like the odds of it going to $1 a lot more than I like the odds of it going to 50 cents (in fact I think if it goes much lower, it may be "back up the truck" time).

Coffee Futures
Coffee was looking strong until Friday, when the Sept contract shed 4 cents. Coffee's volatility always makes me sick to my stomach, and this ride with it is no different. Coffee's another crop that's been due for a mega-spike, and we just haven't seen it yet. Maybe this is the time, but if it's not, I'll look to exit quickly. However I may not be quick enough - this volatility can really nail you if it gaps down.

Sugar Futures
Looking strong, I'm planning to pyramid each cent up if this climb continues.

Live Cattle Futures
Holding tight here for now as well. Not looking to add, but watching these contracts closely. I like the Dec and Feb contracts more than I like the Oct. Everyone knows cattle is going higher, but is it already priced into the forward looking contracts? I think the upside potential still outweights any downside (which I view as minimal). However it's frustrating to see the meats trade in concert with the grains - I think no matter where the grains go from here, the input costs will still be sufficiently high to push the meats higher in the long term. However like it or not, they are trading in concert with the grains in the short term - and the grains are down big in Asia tonight as I type, so possibly look out tomorrow.

Open Positions Date Position Qty Month/Yr Contract Strike Call/Put Entry Price Last Price Profit/Loss Action 06/17/08 Long 1 DEC 08 Cotton 82.20 75.86 ($3,170.00) 06/26/08 Long 1 SEP 08 Coffee 'C' 153.30 151.25 ($768.75) 05/08/08 Long 1 OCT 08 Live Cattle 105.350 111.525 $2,470.00 05/09/08 Long 1 OCT 08 Live Cattle 106.700 111.525 $1,930.00 06/16/08 Long 1 DEC 08 Live Cattle 112.750 114.500 $700.00 06/19/08 Long 1 FEB 09 Live Cattle 116.200 116.100 ($40.00) 06/18/08 Long 1 OCT 08 Sugar #11 12.88 13.89 $1,131.20 07/01/08 Long 1 OCT 08 Sugar #11 13.90 13.89 ($11.20) Net Profit/Loss On Open Positions: $2,241.25

Account Balances
Current Cash Balance	$85,609.47
Open Trade Equity	$2,241.25
Total Equity	$87,850.72
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$87,850.72

Cashed out: $15,000.00
Total value: $102,850.72

Weekly return: -5.3%
YTD return: 31.4%

***BTW, I usually "cash out" money just to pay for taxes, rent, and cheap beer. So total value is all pre-tax.

NY Times: Hoarding Nations Drive Food Costs Even Higher

According to a recent NY Times article, at least 29 nations have recently curbed food exports.

Take a wild guess what happens when nations curb exports of something - I'll give you a hint, it's not bearish for prices.

Also this quote struck me in the article:
“The main cause of rising rice prices is the rising cost of rice planting,” said Surapong Suebwonglee, the finance minister of Thailand, the world’s largest rice exporter.

No more cheap energy means no more cheap food.

Current Commodity Futures Positions - 6/29/08

A nice little week - good to be back in the win column. Things cooled off later in the week for me, mostly as wheat plummeted in late trading hours Friday morning. However cattle ended the week very strong, which was great to see.

My new policy of watching the charts, rather than my account, helped me keep my zen about me. I'd recommend this to anyone who feels a pit in your stomach watching big $$$ evaporate by the minute. Better to calculate your position sizes, then put the position on, and detach yourself from it.

On a personal note, I had set a stretch goal of doubling my account during the first half of the year. Then I would have the second half of the year to double it again, and if I came close, then poof - I'd have some degree of financial autonomy.

Unfortunately it didn't happen, though there were some very promising moments (esp. the rocket start early in the year). However can't complain at all about 38% YTD. I'm looking forward to the 2nd half of the year, as I think cattle, sugar, cotton, and coffee all have rally potential. That doesn't mean it will happen, but it's worth keeping an eye on and a toe in the water.

Open Positions

Date Position Qty Month/Yr Contract Strike Call/Put Entry Price Last Price Profit/Loss 06/17/08 Long 1 DEC 08 Cotton 82.20 81.15 ($525.00) 06/26/08 Long 1 SEP 08 Coffee 'C' 153.30 151.95 ($506.25) 05/08/08 Long 1 OCT 08 Live Cattle 105.350 112.400 $2,820.00 05/09/08 Long 1 OCT 08 Live Cattle 106.700 112.400 $2,280.00 06/16/08 Long 1 DEC 08 Live Cattle 112.750 114.900 $860.00 06/19/08 Long 1 FEB 09 Live Cattle 116.200 117.000 $320.00 06/18/08 Long 1 OCT 08 Sugar #11 12.88 12.78 ($112.00) 06/11/08 Long 1 SEP 08 Wheat 867 3/4 908 $2,012.50 Net Profit/Loss On Open Positions: $7,149.25

Account Balances
Current Cash Balance	$85,663.00
Open Trade Equity	$7,149.25
Total Equity	$92,812.25
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$92,812.25

Cashed out: $15,000.00
Total value: $107,812.25

Weekly return: 2.9%
YTD return: 38.0%

***BTW, I usually "cash out" money just to pay for taxes, rent, and cheap beer. So total value is all pre-tax.

Weekly Positions Update - 6/22/08

Sticking with the rules here, I'm now into cotton and sugar on their respective breakouts. Still like the live cattle and added some longer dated contracts this week. Will probably not add to this position, as it's heavy enough.

Got scared out of corn early - I ended up selling at the break even mark. Wheat is now breaking down a bit, as are the rest of the grains. Time will tell if this is a breather, or if things were overdone during the past breakout. I'm leaning towards breather, as I think things are worse in the Midwest than many believe.

And how about coffee and it's 7-cent pop on Friday...don't we wish we were in that one :( Well prior to the breakout, it was the pure definition of range bound. So unless you caught it right on the breakout, it's really tough to kick ourselves over missing it. Hey, if it's really heading higher, we'll have plenty of time to get into the trade.

Open Positions

Date Position Qty Month/Yr Contract Strike Call/Put Entry Price Last Price Profit/Loss Market Value Action 06/17/08 Long 1 DEC 08 Cotton 82.20 79.99 ($1,105.00) 05/08/08 Long 1 OCT 08 Live Cattle 105.350 112.100 $2,700.00 05/09/08 Long 1 OCT 08 Live Cattle 106.700 112.100 $2,160.00 06/16/08 Long 1 DEC 08 Live Cattle 112.750 113.600 $340.00 06/19/08 Long 1 FEB 09 Live Cattle 116.200 116.100 ($40.00) 06/18/08 Long 1 OCT 08 Sugar #11 12.88 13.00 $134.40 06/11/08 Long 1 SEP 08 Wheat 867 3/4 873 1/2 $287.50 Net Profit/Loss On Open Positions: $4,476.90

Account Balances
Current Cash Balance	$85,680.27
Open Trade Equity	$4,476.90
Total Equity	$90,157.17
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$90,157.17

Cashed out: $15,000.00
Total value: $105,197.17

Weekly return: -2.7%
YTD return: 34.5%

***BTW, I usually "cash out" money just to pay for taxes, rent, and cheap beer. So total value is all pre-tax.

Runaway Grains, Never Coming Back

Looks like this corn crop is toast, and the other grains could be in trouble too. High input costs (diesel, fertilizer, etc) are really hammering farmers and their motivation to replant crops this late in the year.

I ponied up for a wheat and a corn contract last night. A little bummed I got into corn so late, but I got stopped out a month ago fair and square - it happens. All we can do is look ahead, and looking ahead now, the upside seems to far outweigh the downside. No telling how high the grains can go - we may be on the verge of a global famine.

Given this, as we've discussed before, meat prices must rise - no way around it! The cattle contracts look especially attractive. Both lean hogs and pork bellies already have premiums priced in for the distant contracts, but I'm not seeing that in the longer term cattle contracts.

Financial Times: IMF warns on global inflation

In an indication the commodities boom may not be the bubble imagined, Mr Lipsky said the forces pushing prices up “appear to be fundamental in nature” – and these were being amplified by lower US interest rates and the dollar’s decline.

Full article

Mises.org: Are We Running Out of Food?

Full article

In vintage Mises fashion, Kel Kelly points out that government is the root problem here, not the solution. Amen!

Dollar rally extends

The dollar rally continues today, on the back of comments by a Fed Head mentioning inflation, and hinting at a potential rate increase in the cards.

I'm filing this one in the category of "I'll believe it when I see it". Personally I wouldn't mind seeing the rally continue, just sweetening the entry prices for when we take the other side of this trade again.

Kevin Kerr Video on MarketWatch

Link to video

He thinks:

• Oil may be due for a pullback
• Low carryover stocks for soybeans

Washington Times: Global food riots turn deadly

Full article

Financial Times: UBS index to focus on food inflation

For those readers not quite ready to open a futures account, here's a good alternative option for you. UBS announced today that they are launching a new index that will focus on food inflation. Needless to say, this index would have produced very nice returns over the past 5 years - and I think the next 5 will bring more of the same.

The nice thing about this index is that it focuses on commodities that are not usually included in typical commodity indices. Most indices have traditionally been heavily weighted in the energy and metal sectors.