ColoradoGirl
New member
Hello! My big brother sent me this and I would love to hear you thoughts!
I know you're not a huge fan of my opinions, especially with regards to cattle, nevertheless, I wanted to share with you why I had concerns. If I didn't see a danger ahead and you did, I would want you to share that danger with me. You may have already considered these points, however, in case you haven't, I'm offering them to you. With that said, I thought I would open up a discussion with you via email, since our conversations can get a little off track.
Markets
If you were curious why cattle prices have come down lately, these concepts seem to be the thematic framework that traders are working through. Obviously since you have feet on the ground, you're thoughts may differ vastly from those seen from my perspective. I acknowledge the information gap between the "real" market and the "paper" market for commodities, in the very short term they can become decoupled, however in the longer term, "paper" is usually quite accurate in the story it tells.
Macro Theme
"Brevity is the soul of wit" said Shakespeare, obviously I'm no William but I'll try to keep this brief. The Federal Reserve has been largely responsible for the run up in commodity prices across the board. I can bring chart after chart to your attention but just trust me on this point, people far smarter than both of us have shown just how high the degree of correlation between the "Quantitative Easing" programs and the commodity price surge since last august. (gee, coincidentally when the fed announced their program.)
http://www.freestockcharts.com?emailChartID=0cba06a6-cfcd-497b-955d-e298f70d8d98 (chart of what I'm talking about. Notice the decline of the dollar and the HUGE spike in commodity prices)
QE (50,000 Feet)
Very basically, Quantitative Easing is a complicated way to say printing money and keeping interest rates low. The very basic theory is that by printing money and keeping interest rates low, it will force people to take risks with their savings instead of keeping them at banks. Also, by keeping interest rates low, it will encourage banks to lend. You can see by looking at the chart what I'm talking about. In august the Fed announced their program. They said it would go through June. This is also why you've seen so much of a sell off over the last month. QE has been not much more than money printing and that money is trying to find a home where it will be treated best. Commodities have been that home to all the excess money. However, once you stop printing that money, the economics take over again. Those "economics" are rolling over as far as the eye can see. (in the short term) (jobs, industrial output, exports…etc) Think of "QE" like heroin to a drug addict. It takes larger and larger doses of heroin to keep the addict feeling any good. Unfortunately for Obama and Bernanke, the effects of more heroin have turned up in our gas prices, food prices…etc…everywhere but where they wanted it to show up, namely, residential real estate. Now that june has arrived, and the QE program is ending, we are temporarily forced as a nation to stand on our own 2 feet. (this actually isn't entirely true because QE lite is still in effect, but that's outside our concern for right now.)
Our Own Two Feet (40,000 Feet)
Now that the patient is being weaned off the drug, we are going to begin feeling the impact of reality. Have more people been put to work? Have REAL wages increased? Has our debt become sustainable? These questions among many others are pretty self explanatory. The government is in a real conundrum. They need more heroin but if it keeps showing up in inflation then it cancels out the effects and begets the opposite response by consumers.
What The Hell Is Your Point…I'm getting there…like I said, I'm no Shakespeare. (30,000 Feet)
How the hell does this all relate to the market for Cows? Well, cows are food. Duh you say. If you bring that Macro framework down to some of the basic commodities, what will people do if they see higher prices for their food if their wages have not kept pace? If you see the price of a hamburger go up to $10 and you see loaf of bread go up to $6, where do you start cutting away at your budget? First you start eating out less and eating in more. Well, look at the share prices of mid-tier restaraunts…that's exactly what happened. Next you start making trade-off type decisions…would I rather eat this, or this? And this is my point! Beef is at the highest tier of the food pyramid and the LOWEST in elasticity. (this means as the price goes up, demand goes way down. That makes it extremely difficult to pass on price increases to consumers. Compare that with high elasticity of electricity, which you will use at almost any price.) Beef is one of the easier indulgences to give up when it gets too expensive. I myself have forgone the steak and instead grabbed some hamburger. Have you changed any of your own habits lately because of the huge run up in commodity prices (think gas, food, energy…etc)? We're not alone!
Input Costs (20,000 Feet)
The highest input costs for ranchers are Feed and Fuel (transport costs). Now in a market where its difficult to pass on price increases you are forced to become more efficient. That means paying labor less, cutting costs…etc. Ranchers can only cut so much. When they can cut no longer, they begin to reduce the size of their herds. We have seen reductions everywhere and the corn/wheat prices persist! This is why cattle lags the grains, you need grains for cattle so if grains get too expensive, you cant feed/grow your cattle. In fact, last year marked the lowest Herd Size in almost 60 years! Low supply, that's good right!? The cure for low prices is always low prices. Those low prices pushed out marginal ranchers by the droves and those that remained were among the stronger hands. Those able to weather the storm have now been rewarded with higher and higher prices. Add to that the "QE" story and you begin to see the perfect storm. Record low supplys in an inflationary environment! That is every ranchers dream!
However!!! (10,000 Feet)
The best cure for high prices is high prices! That is a maxim that is true for every market. Why? Because as more and more people read the "fundamental" reason behind the price move, it attracted more and more market participants. It provided the incentive Ranchers needed to GROW their herds, which was done for the first time in many years last year! Before the QE program, Ranchers had cattle (inventory) grown with LAST YEARS low prices, this is why it temporarily looked so profitable to be a rancher! Now with high grain prices and the southern droughts, this year that equation has DRAMATICALLY flipped! Now, I'm not suggesting the bull market in Beef is over, far from it! However, until you get a MASSIVE drop in grain prices and fuel costs, Ranchers will have a tough time maintaining their herds. This is WILDLY bullish for cattle next year or the year after, but temporarily bad for prices in the next 3-12 months. Because so many ranchers were trying to "lock in" the record prices, they collapsed the price! This collective effort around the country to sell at the high prices has been responsible for the dramatic price decline in cattle, however, because of the reduction in cattle head counts, the prices should firm up dramatically after the liquidation stops. This is why I've encouraged you to wait if you can.
2 Outliers
Monetary Policy and the Presidential Election Cycle is seldom taken into consideration by ranchers. I believe it will become very prudent for you to keep this in mind in the future. I think the catalysts to MUCH higher prices in the Cattle market will be in the form of monetary policy NOT demand. When the presidential election cycle begins and if we see a continuing decline in the price of commodities, (which I think we'll see over the next 2-6 months…which is why I'm worried you'd be selling at the bottom) I believe there will be a stimulus program of one kind or another and Obama will do whatever it takes to get reelected. There is no possibility of his reelection if the stock market is down, unemployment is up and QE is seen as a failure. That said, I think 3-6 months AFTER their next "program" will be the sweet spot to sell your cows.
Summary
Now of course, all of what I've said is a massive speculation. I would really encourage some debate if you have a different perspective on my theme. I would also really appreciate Steve's perspective and I would encourage you to forward him my email to open this discussion. I don't have "feet on the ground" like you guys do, but I have a very good grasp of things from the birds eye view. Do I think you'll fail, NO AND NEVER! I hope, and pray, that you make tons of money, but its always easiest to make money when the odds are in your favor. Its my firm belief that if you can hold your cattle until next year the odds swing dramatically back into your favor. Does that mean you can't make money when the odds are against you? NOPE! But most lose, that's why they're odds. They PROVE the RULE rather than the EXEPTION. All of us believe that we are the exception and all of us think that we're special and it wont happen to us, however if history shows us anything, its that each of us prove that we are the rule rather than the exception. Its for that reason that I share my worries with you, I always want the odds in your favor. Not because I'm trying to cause doubt, or make you feel bad, it's because I love you and want no harm to come to you.
Please share with me your thoughts, please open this discussion with the experts youre surrounded by and get their opinions. These are just my opinions and observations and I don't know if I'm right. However, I'm willing to put my own money behind these observations because I think the odds are in my favor.
I know you're not a huge fan of my opinions, especially with regards to cattle, nevertheless, I wanted to share with you why I had concerns. If I didn't see a danger ahead and you did, I would want you to share that danger with me. You may have already considered these points, however, in case you haven't, I'm offering them to you. With that said, I thought I would open up a discussion with you via email, since our conversations can get a little off track.
Markets
If you were curious why cattle prices have come down lately, these concepts seem to be the thematic framework that traders are working through. Obviously since you have feet on the ground, you're thoughts may differ vastly from those seen from my perspective. I acknowledge the information gap between the "real" market and the "paper" market for commodities, in the very short term they can become decoupled, however in the longer term, "paper" is usually quite accurate in the story it tells.
Macro Theme
"Brevity is the soul of wit" said Shakespeare, obviously I'm no William but I'll try to keep this brief. The Federal Reserve has been largely responsible for the run up in commodity prices across the board. I can bring chart after chart to your attention but just trust me on this point, people far smarter than both of us have shown just how high the degree of correlation between the "Quantitative Easing" programs and the commodity price surge since last august. (gee, coincidentally when the fed announced their program.)
http://www.freestockcharts.com?emailChartID=0cba06a6-cfcd-497b-955d-e298f70d8d98 (chart of what I'm talking about. Notice the decline of the dollar and the HUGE spike in commodity prices)
QE (50,000 Feet)
Very basically, Quantitative Easing is a complicated way to say printing money and keeping interest rates low. The very basic theory is that by printing money and keeping interest rates low, it will force people to take risks with their savings instead of keeping them at banks. Also, by keeping interest rates low, it will encourage banks to lend. You can see by looking at the chart what I'm talking about. In august the Fed announced their program. They said it would go through June. This is also why you've seen so much of a sell off over the last month. QE has been not much more than money printing and that money is trying to find a home where it will be treated best. Commodities have been that home to all the excess money. However, once you stop printing that money, the economics take over again. Those "economics" are rolling over as far as the eye can see. (in the short term) (jobs, industrial output, exports…etc) Think of "QE" like heroin to a drug addict. It takes larger and larger doses of heroin to keep the addict feeling any good. Unfortunately for Obama and Bernanke, the effects of more heroin have turned up in our gas prices, food prices…etc…everywhere but where they wanted it to show up, namely, residential real estate. Now that june has arrived, and the QE program is ending, we are temporarily forced as a nation to stand on our own 2 feet. (this actually isn't entirely true because QE lite is still in effect, but that's outside our concern for right now.)
Our Own Two Feet (40,000 Feet)
Now that the patient is being weaned off the drug, we are going to begin feeling the impact of reality. Have more people been put to work? Have REAL wages increased? Has our debt become sustainable? These questions among many others are pretty self explanatory. The government is in a real conundrum. They need more heroin but if it keeps showing up in inflation then it cancels out the effects and begets the opposite response by consumers.
What The Hell Is Your Point…I'm getting there…like I said, I'm no Shakespeare. (30,000 Feet)
How the hell does this all relate to the market for Cows? Well, cows are food. Duh you say. If you bring that Macro framework down to some of the basic commodities, what will people do if they see higher prices for their food if their wages have not kept pace? If you see the price of a hamburger go up to $10 and you see loaf of bread go up to $6, where do you start cutting away at your budget? First you start eating out less and eating in more. Well, look at the share prices of mid-tier restaraunts…that's exactly what happened. Next you start making trade-off type decisions…would I rather eat this, or this? And this is my point! Beef is at the highest tier of the food pyramid and the LOWEST in elasticity. (this means as the price goes up, demand goes way down. That makes it extremely difficult to pass on price increases to consumers. Compare that with high elasticity of electricity, which you will use at almost any price.) Beef is one of the easier indulgences to give up when it gets too expensive. I myself have forgone the steak and instead grabbed some hamburger. Have you changed any of your own habits lately because of the huge run up in commodity prices (think gas, food, energy…etc)? We're not alone!
Input Costs (20,000 Feet)
The highest input costs for ranchers are Feed and Fuel (transport costs). Now in a market where its difficult to pass on price increases you are forced to become more efficient. That means paying labor less, cutting costs…etc. Ranchers can only cut so much. When they can cut no longer, they begin to reduce the size of their herds. We have seen reductions everywhere and the corn/wheat prices persist! This is why cattle lags the grains, you need grains for cattle so if grains get too expensive, you cant feed/grow your cattle. In fact, last year marked the lowest Herd Size in almost 60 years! Low supply, that's good right!? The cure for low prices is always low prices. Those low prices pushed out marginal ranchers by the droves and those that remained were among the stronger hands. Those able to weather the storm have now been rewarded with higher and higher prices. Add to that the "QE" story and you begin to see the perfect storm. Record low supplys in an inflationary environment! That is every ranchers dream!
However!!! (10,000 Feet)
The best cure for high prices is high prices! That is a maxim that is true for every market. Why? Because as more and more people read the "fundamental" reason behind the price move, it attracted more and more market participants. It provided the incentive Ranchers needed to GROW their herds, which was done for the first time in many years last year! Before the QE program, Ranchers had cattle (inventory) grown with LAST YEARS low prices, this is why it temporarily looked so profitable to be a rancher! Now with high grain prices and the southern droughts, this year that equation has DRAMATICALLY flipped! Now, I'm not suggesting the bull market in Beef is over, far from it! However, until you get a MASSIVE drop in grain prices and fuel costs, Ranchers will have a tough time maintaining their herds. This is WILDLY bullish for cattle next year or the year after, but temporarily bad for prices in the next 3-12 months. Because so many ranchers were trying to "lock in" the record prices, they collapsed the price! This collective effort around the country to sell at the high prices has been responsible for the dramatic price decline in cattle, however, because of the reduction in cattle head counts, the prices should firm up dramatically after the liquidation stops. This is why I've encouraged you to wait if you can.
2 Outliers
Monetary Policy and the Presidential Election Cycle is seldom taken into consideration by ranchers. I believe it will become very prudent for you to keep this in mind in the future. I think the catalysts to MUCH higher prices in the Cattle market will be in the form of monetary policy NOT demand. When the presidential election cycle begins and if we see a continuing decline in the price of commodities, (which I think we'll see over the next 2-6 months…which is why I'm worried you'd be selling at the bottom) I believe there will be a stimulus program of one kind or another and Obama will do whatever it takes to get reelected. There is no possibility of his reelection if the stock market is down, unemployment is up and QE is seen as a failure. That said, I think 3-6 months AFTER their next "program" will be the sweet spot to sell your cows.
Summary
Now of course, all of what I've said is a massive speculation. I would really encourage some debate if you have a different perspective on my theme. I would also really appreciate Steve's perspective and I would encourage you to forward him my email to open this discussion. I don't have "feet on the ground" like you guys do, but I have a very good grasp of things from the birds eye view. Do I think you'll fail, NO AND NEVER! I hope, and pray, that you make tons of money, but its always easiest to make money when the odds are in your favor. Its my firm belief that if you can hold your cattle until next year the odds swing dramatically back into your favor. Does that mean you can't make money when the odds are against you? NOPE! But most lose, that's why they're odds. They PROVE the RULE rather than the EXEPTION. All of us believe that we are the exception and all of us think that we're special and it wont happen to us, however if history shows us anything, its that each of us prove that we are the rule rather than the exception. Its for that reason that I share my worries with you, I always want the odds in your favor. Not because I'm trying to cause doubt, or make you feel bad, it's because I love you and want no harm to come to you.
Please share with me your thoughts, please open this discussion with the experts youre surrounded by and get their opinions. These are just my opinions and observations and I don't know if I'm right. However, I'm willing to put my own money behind these observations because I think the odds are in my favor.
