Commodity Trade Alert

(Agrimoney) Coffee recovered from its three-year low in London, and rebounded 2% in New York, after Colombia unveiled a 25% slide in production and Vietnam began building up stockpiles of robusta beans.

Robusta beans for March delivery closed up $9 at $1,199 a tonne in London, with the better-traded May contract jumping $23 to $1,245 a tonne.

The first price rise in four trading days followed confirmation of the start of a government-backed programme of coffee purchases by Vietnamese companies, with the aim of stockpiling 200,000 tonnes of the crop, nearly 20% of the country’s annual production.

‘Output should contract sharply’

Furthermore, many analysts believe the weak market which has prompted the stock-building will prompt Vietnam, the biggest robusta producer, to hold back on production.

“We expect prices to stabilise, since at the current low price levels output should contract sharply in Vietnam,” Commerzbank analysts said.

They also took an optimist’s view of a near-halving, to 22,000 tonnes, in exports of robusta beans last month from Brazil, the second-ranked producer.

“The sharp decline could be the result of higher domestic consumption, reducing the amount of robusta coffee that is available for shipments overseas,” the bank said.

Colombian slide 

Meanwhile, arabica coffee beans, which last week touched a five-month low, rose more than 2% in New York after Colombia reported February production at 650,000 bags (39,000 tonnes), down 218,000 bags year on year.

The figure was lower than the 700,000 bags that Colombia’s coffee growers’ federation had expected, although Luiz Munoz, the association’s director, said that the country was still on track to hit a half-year production target of 5m bags (300,000 tonnes).

Output in Colombia, the second-biggest producer of arabica beans after Brazil, has been dented by poor weather and a replanting programme which has reduced short-term output potential.

Buy stops triggered 

Technical factors also helped the arabica market, after the May contract broke through a resistance level at 132 cents a pound.

“Getting above there set a few buy stops off,” Ralph Hawes, at Sucden Financial in London, told Agrimoney.com, adding that technical analysis suggested that a close at about 132.50 cents a pound could spark a move to 136-137 cents a pound.

Coffee traders have also flagged managed funds’ increasing bearishness over coffee, with short positions exceeding longs by 3,195 contracts last week, according to regulatory data.

Ironically, such movements have often, as in autumn 2008 and spring 2007, heralded an upturn in prices.

New York’s May coffee contract closed up 1.3% at 132.75 cents a pound. Full: http://www.agrimoney.com/news/coffee-revives-as-vietnam-starts-stockpiling–1448.html

(Agrimoney) The US corn crop may not be due for a downgrade on Wednesday as many investors are expecting, with losses to late harvesting already more than accounted for, a leading analyst has said.

Observers are on average expecting the US Department of Agriculture to cut its estimate of US corn production in 2009-10 by 70m bushels when it releases its latest monthly global crop supply and demand report, key events of the farm commodities calendar.
The USDA has, unusually, resurveyed corn farmers after wet weather left harvesting at its most delayed for at least a generation.
However, Don Roose, the president of broker US Commodities, said that the USDA revision will be upward, predicting a rise of 50m-75m bushels to the production figure.
Less from history

“When the original survey was undertaken, when such a difficult harvest was going on, farmers would already have accounted for the difficulties in conditions,” Mr Roose told Agrimoney.com.

He added: “History shows us that big crops get bigger, and small crops get smaller.”
His comments echo a long-held belief at Goldman Sachs which was noting as early as November the likelihood of the US corn crop defying expectations by beating previous official forecasts. “In the seven instances since 1974 when corn harvest was less than 50% completed as of the last week of October, yields were revised down from the [USDA] October estimate in only three instances and the average revision was an increase of +1.8 bushels per acre,” the investment bank said in a note in January.  Full:

(Globe and Mail) Some of the boldest speculative oil traders at banks and hedge funds are betting on a return of gasoline’s strength ahead of peak summer demand, bringing an early shift to summer from winter to the oil market.

Many traders use a popular spread play between gasoline and heating oil to try to make money from seasonal shifts in demand in the Northern Hemisphere.  But the spread is one of the most volatile and unpredictable in the oil market and is often called “the widowmaker” after the plight of those who have made the wrong bet.

Unusually cold winter weather and a belief in resurgent gasoline demand this summer has lured traders back onto the seasonal play after 2009’s relatively flat demand picture, analysts and traders said. “We have seen massive speculative inflows this year and this has helped boost the gasoline premium over distillates,” said Olivier Jakob of Petromatrix. “It is trying to price in the gasoline season a bit early.”

Traders said historically low refinery utilization rates of around 80 per cent in the United States and Europe triggered by a sharp drop in industry demand for middle distillates, such as diesel, should constrain gasoline supply in the world’s top oil consumer. “The hot money is on gasoline this season and a lot of hedge funds have bet on it,” said an oil products trader at a bank and a regular widowmaker trader.

“Seasonality is back because of run cuts and because it’s been such a cold winter. There is a belief that demand for gasoline will be very good this year because it is not as connected to the recession as distillates,” the trader said. The disappearance of one of last year’s most lucrative revenue streams, the floating storage contango play, may also be boosting the appeal of the “gas to heat” spread, sources said.

Those who backed the liquid RBOB gasoline futures contract on the New York Mercantile Exchange are already reaping the rewards after the front month contract jumped to a premium in late January, while historical data shows this typically happens in late February or early March. Gasoline’s premium to heating oil rose sharply again in March as the benchmark RBOB price shot to a 17-month high of $2.2951 (U.S.) a gallon on 8 March.

Open interest on U.S. RBOB gasoline futures rose 76.5 per cent above last year’s levels to 264,600 lots in February as speculative players increased length, the U.S. Commodity Futures Trading Commission said in a report. Non-commercial players made up 29 per cent of open interest on RBOB gasoline futures in February, compared with 24 percent a year earlier, the report showed. If the rewards for the play can be rich, the losses can be brutal.

In 2008 gasoline remained below heating oil all summer as record high crude prices over $147 a barrel slashed demand for the motor fuel. A crushing position on the wrong side of that anomaly brought a case of a loss of up to $500 million, traders said. “It is called the widowmaker for a reason,” said a New York-based oil products broker.

The most active spread players are trading firms Vitol, Trafigura and Glencore and hedge funds in commodities trading such as Bluegold and Tudor Investment Corp., trade sources said. Traders at banks such as Morgan Stanley and J.P. Morgan are also big players, they said. By backing gasoline, this year’s bulls are betting that a sizeable chunk of U.S. and European refining capacity shut for maintenance or due to poor margins will remain offline.

“We expect U.S. gasoline stocks to draw down over the coming four months, driven partly by heavy Midwestern refinery maintenance and the seasonal increase in demand,” said J.P. Morgan analyst Lawrence Eagles in a research note. But some argued that better gasoline margins will encourage refiners to ramp up production. One trader estimated that 3 million barrels a day of capacity will be back by late April.

“We could see higher runs if the margins are so good and a shift in yields from heating oil to gasoline. It will probably keep a certain premium but the crack (gasoline margin) is overdone,” said Mr. Jakob. Other unpredictable factors like hurricanes can also affect the spread.

“People think they can trade it because it is seasonal but sometimes it just blows the other way and catches people off guard,” said an oil products trader with a hedge fund. “Even the most experienced traders get caught out.”  Full: http://is.gd/a3j4w

A big “yeah right” to this story (below picture).  China is screwed…yeah the gold market is too small, that’s because you can’t just print more and guess what they have $1.4 trillion in foreign currency reserves…you know fiat money…and only 1.8% of that in gold versus 10% that the rest of the world has…they can buy it here at these prices or later at possibly much higher prices…either way if they want to be a modern economic force and not watch their massive fiat foreign currency reserves be devalued away…they need it and they need it now….in fact they should probably buy as much gold as they possibly can before they loosen their yuan’s peg to the dollar…which the world is demanding that they do immediately…as they have maintained an unfair competitive trade advantage due to an undervalued yuan for years….

(Bloomberg) — Gold is “unlikely” to be China’s primary investment to diversify its reserve holdings because of price risks, Yi Gang, head of the State Administration of Foreign Exchange, said today.

The “gold price has had handsome gains in recent years,” Yi said at a briefing in Beijing today. Still, “if we look at the past 30 years, it had big ups and downs.” China is the world’s largest producer of gold and the second-biggest consumer after India.

China increased its reserves by 454 tons to 1,054 tons since 2003, and has the world’s fifth-biggest holding by country, the administration said in April last year. The amount is worth $37.96 billion at current prices. India and Russia added to gold reserves last year as the metal capped its longest winning streak since at least 1948, joining other investors acquiring the metal via exchange-traded funds.

“This may have a short-term negative impact on gold prices as one of the key reasons for the rally in the past year has been the expectation of central banks buying,” said Li Ning, an analyst at China International Futures (Shanghai) Co.

Gold for immediate delivery fell as much as 0.3 percent to $1,119.95 an ounce, before trading at $1,121.44 by 12:15 p.m. Singapore time. Bullion climbed 24 percent last year, a ninth annual gain, as the dollar tumbled 4.2 percent against a six- currency basket. It reached a record $1,226.56 on Dec. 3.

‘Unlikely Investment’

“Gold is unlikely to become a primary investment for China’s reserve,” Yi said. “The size of the world’s gold market is small. China’s purchase will push up the prices. That will also hurt Chinese gold consumers.” Private holdings in China are more than 3,000 tons, Yi said.

China isn’t a “realistic candidate” to buy bullion from the International Monetary Fund, the World Gold Council said Feb. 22.

“We’re not surprised to see that China has not” purchased IMF gold, said George Milling-Stanley, the London- based council’s managing director for government affairs, said last month. The country is more likely to “buy local gold production” to add to its reserves, Milling-Stanley said.

Analysts including Citigroup Inc.’s Alan Heap have said that the People’s Bank of China is likely to buy bullion from the IMF in order to diversify its assets.

SPDR Holdings

Holdings in the SPDR Gold Trust, the biggest backed by bullion, reached a record 1,134 tons on June 1. Billionaire George Soros’s Soros Fund Management LLC added 3.728 million shares valued at $421 mllion in the trust in the fourth quarter, according to U.S. Securities and Exchange Commission filings.

“Medium to long term, gold continues to be supported by investors looking to hedge against weakness in currencies like the euro and the dollar,” said China International’s Li.

China Investment Corp., the nation’s sovereign wealth fund, took a 1.45 million-share stake worth $155.6 million, according to U.S. filings last month.

“Regarding people’s recommendations on increasing our gold reserves, we’ll consider it prudently according to the market conditions,” Yi said.   Full: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a80hbEcNrCdc

(FT) Crude futures are doing a slow-motion backflip, stoking speculation about the next move for oil prices. The futures curve, plotted with prices of oil to be delivered in successive months, has flattened. Late last year, a barrel of US oil for immediate delivery cost $2.35 less than one due a month later. Today the spread is about 40 cents, approaching the narrowest in 1½ years.

Several Wall Street analysts say the market is poised to flip even further, with spot prices rising above longer-dated futures for the first time since mid-2008. The inverted price pattern they envisage – called “backwardation” among economists – would signal a world in which oil demand catches up with supply after a severe, recession-induced lag. This would skim excess inventories from storage terminals.

Backwardation could also increase the number of investors that put a record $68bn into commodities last year, helping keep benchmark oil prices above $80 a barrel. West Texas Intermediate touched an eight-week high of $82.41 on Monday .

Futures patterns are affected by how much of a given commodity is in storage. If tanks are awash in oil, the market is less at risk of a supply shock and oil for prompt delivery is cheap relative to later-dated futures contracts, a pattern known as “contango”.

Conversely, low inventory levels make immediate access to oil very valuable, giving promptly delivered oil a premium.

Spot prices moved into contango as demand collapsed in the recession. Unused oil strained tank capacity at locations including Cushing, Oklahoma, the delivery point for US crude futures, severely discounting the front of the price curve.

Now there are glimmers of a change. Demand, still weak in the west, is growing in China, India and other emerging economies. The International Energy Agency predicts global oil use will grow by 1.8 per cent to 86.5m barrels a day in 2010 after two years of decline. “What you’ve got is a global balance that is tightening, and probably more quickly than a lot of people are expecting,” says Amrita Sen of Barclays Capital.

Oil markets are not tight yet, particularly in the US and Europe. Still, David Greely, of Goldman Sachs, anticipates global inventories will keep falling, changing price spreads and lifting crude into the $85-$95 a barrel range in the second half of the year. Oil traders say a popular recent bet was “calendar spread options”, profitable if April crude loses its discount to May.

Physical commodities merchants say forward and spot prices will slowly converge, though they do not see imminent backwardation. “We see the contango dissipating,” says Ricardo Leiman, chief executive at Noble, the Hong-Kong based trader.

A shift to backwardation would be important for investors in commodities. Since many passively trade expiring futures for later-dated ones, they have to pay a premium when the market is in contango. Backwardation instead means selling old futures for a small notional profit every month.  Full: http://is.gd/9YXjG

(Telegraph.co.uk) China could end its near two-year currency peg on the dollar by as soon as next month, according to respected economist Professor Nouriel Roubini, in a prediction that could have major implications for global trade markets.

Professor Roubini – known as “Dr Doom” due to his pessimistic take on the global economic outlook – believes that the Chinese central bank could let the yuan appreciate as soon as the second quarter.

The economist made his predictions ahead of a statement at the weekend by Zhou Xiaochuan, governor of the People’s Bank of China, in which he said China should be “very cautious” when making a move.

Governor Zhou cautioned that the “global recovery isn’t solid” and that therefore China should take care about the “timing of normalising the policies” including its stance on the yuan.

However, Prof Roubini believes that the Beijing government will authorise a 2pc increase against the dollar initially, followed by a further 1pc-2pc strengthening over the next 12 months.

“They will move by a token amount. The world is much cloudier in every dimension. They are super cautious,” Prof Roubini told Bloomberg News.

If Beijing were to allow the yuan to rise against the dollar, it would be the first time since July 2008 that the Chinese currency – which rose 21pc in the three years prior to the hold being imposed – has been allowed to gain ground.

Such a move would also ease relations with Washington, as President Barack Obama and Tim Geithner, the US Treasury Secretary, have both been critical of Beijing’s stance over the yuan.

The US government has argued that the current situation creates an unfair playing field for China’s exports, keeping the price of Chinese imports artificially low so as to undercut domestic suppliers.

Prof Roubini’s comments follow those of Jim O’Neill, Goldman Sachs’ chief economist, who predicted in February that “something’s brewing” in China over the yuan.

But not everyone is convinced. “Given Zhou’s caution – which echoed similar comments on the state of the recovery made by prime minister Wen Jiabao on Friday – it is hard to imagine any major shift in exchange rate policy happening in coming weeks,” said Mark Williams, of Capital Economics.

“In particular, the chances of an imminent one-off step revaluation, as some had thought likely, are surely very low,” added Mr Williams, who believes that when a shift does come, it will be to a “crawling peg” with a chance the dollar will be replaced by a basket of currencies as the target.  Full: http://is.gd/9YW0e

(FT) China’s central bank chief laid the groundwork for an appreciation of the renminbi at the weekend when he described the current dollar peg as temporary, striking a more emollient tone after months of tough opposition in Beijing to a shift in exchange rate policy.

Zhou Xiaochuan, governor of the People’s Bank of China, gave the strongest hint yet from a senior official that China would abandon the unofficial dollar peg, in place since mid-2008. He said it was a “special” policy to weather the financial crisis.  Full: http://is.gd/9YSLk

(Huffington Post – Janet Tavakoli) Congress should act immediately to abolish credit default swaps on the United States, because these derivatives will foment distortions in global currencies and gold. Failure to act now will only mean the U.S. will be forced to act after these “financial weapons of mass destruction” levy heavy casualties. These obligations now settle in euros, but the end game is to settle them in gold. This is so ripe for speculative manipulation that you might as well cover the U.S. map with a bull’s-eye.

Credit default swaps are not insurance. If you buy fire insurance on your home, you must own the house. If you buy credit protection on the United States, however, you do not need to own U.S. Treasury bonds. If your protection gains value after you buy it — not because the U.S. defaults, but because of market mood changes — you can resell that protection and make a profit.

Lower credit risk means a lower price for protection. Zero implies zero risk. The higher the basis points, the higher the implied risk. When U.S. credit default swaps were first introduced, the price of protection was around two basis points. According to Bloomberg, the price for five-year protection was around 38 basis points (per annum) on Friday. But the price in the over-the-counter market — where this stuff actually trades — was almost double or around 75 basis points.

Since most traders in U.S. credit default swaps don’t think the U.S. will default any time soon, why are they trading U.S. credit default swaps? They are speculating on price movements the way a day trader buys and sells stocks to speculate on stock price movements.

Volume in U.S. credit default swaps is relatively small, but it can explode rapidly, just as volume expanded rapidly for credit default swaps on mortgage debt in 2006 and 2007.

Speculators Want U.S. CDS Payoffs in Gold

Remember AIG? When prices moved against AIG on its credit default swap contracts, AIG owed cash (collateral) to its trading partners. AIG paid billions of dollars and owed billions more when U.S. taxpayers bailed it out in September 2008.

U.S. credit default swaps currently trade in euros. After all, if the U.S. defaults, who will want payment in devalued U.S. dollars? The euro recently weakened relative to the dollar, and market participants are calling for contracts that require payment in gold. If they get their way, speculators on the winning side of a price move will demand collateral paid in gold.

The market can create an unlimited number of these contracts very rapidly. The U.S. wouldn’t have to ever default to trigger a major disruption in the gold market. Spreads (or prices) on the credit default swaps could simply move based on “news,” and demand for gold would soar.

If this speculation drives up the price of gold, and the available gold supply becomes limited, are you willing to post your children as collateral? I am pushing the point so that we put a stop to this before it is too late.

Global Disaster in the Making

More than a year has passed since former Treasury Secretary Henry Paulson went to Congress in September 2008 to plead for special powers and TARP money to bail out U.S. financial institutions. Yet there has been no meaningful financial reform.*

The European Union has its own challenges. German Chancellor Angela Merkel recently called for limits on credit derivatives on Greece, since the European Union is concerned about misuse of credit derivatives for speculation. Chancellor Merkel did not go far enough.

World leaders shouldn’t merely ask for limits on sovereign credit derivatives. They should demand a ban on all sovereign credit default swaps.  Full: http://www.huffingtonpost.com/janet-tavakoli/washington-must-ban-us-cr_b_489778.html

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago’s Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

(Market Folly) Two big name hedge funds have recently set their sights on the same investment. John Paulson’s firm Paulson & Co and George Soros’ hedge fund firm Soros Fund Management are set to purchase shares of NovaGold Resources (NG) in separate offerings by the company.

Full: http://www.marketfolly.com/2010/03/paulson-soros-to-buy-novagold-resources.html

Jim Rogers Discusses Greece’s Fiscal Woes, Euro on Bloomberg TV Interview: http://is.gd/9XNQ3