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Commodities Traders May Face Curbs Under EU Proposals-Fullermoney

Commodities Traders May Face Curbs Under EU Proposals-Fullermoney

Commodities Traders May Face Curbs Under EU Proposals - This item from Bloomberg today covers the latest development in what has rapidly become a political issue. Here is the opening:

Commodity traders in the European Union may face restrictions including position limits under proposals from the European Commission aimed at curbing excessive price volatility.

Curbing the proportion of a commodity derivatives market that a single trader can control may help rein in "excessive speculation," the commission said in an e-mailed statement. Price fluctuations hurt farmers, food-makers and consumers, including in the poorest countries, the commission said.

"We need regulators to keep a closer eye on positions taken up in respect of commodity derivatives," Michel Barnier, the EU's financial services chief told reporters in Brussels today. "This will include the possibility of introducing position limits if necessary," he said. "Personally speaking I believe in this."

French President Nicolas Sarkozy said in Davos last week that speculation was driving up food prices. World food costs rose to a record in December on higher costs for sugar, grain and oilseeds, according to a United Nations report earlier this month, contributing to the uprising that ousted Tunisia's Zine El Abidine Ben Ali on Jan. 14. Protests have spread to Egypt, Algeria, Morocco and Yemen.

The possible trading measures are included in a strategy paper published today by the commission on commodities markets and raw materials.

My view - Commodities have entered the second decade of a secular bull market or supercycle, which resumed following the 2008 global market meltdown. This is fundamentally driven by factors which Fullermoney has long summarised as: Supply Inelasticity Meets Rising Demand.
Commodity price moves, particularly to the upside over the last decade, have also been propelled by speculation because most investors and traders wish to participate in 'the best game in town'. We saw this in 1H 2008 and we have seen it again in recent months.

When the combined factors of fundamental shortages and speculation create front page headlines regarding commodity price inflation and shortages, governments are often blamed. We have seen this in a number of countries recently, not least China and India in recent months and Egypt over the last few weeks.
This item continues in the Subscriber's Area.

Email of the day - More on US defaults:
"On the defaults of the USA mentioned in today's comment; I would like to add that the USA also defaulted on their obligation to sell gold at 35 usd/ounce in 1971. Those of us who are old enough would remember that...Thanks again for warning us on fiat currencies. What a wonderful service you give."
My comment - Good point and thanks for the feedback. No country has ever been able to maintain the discipline of a gold standard.

La Niña rages on - Here are the latest reports on two storms likely to increase prices for the commodities affected:
Cyclone Yasi, Winds Stronger Than Katrina, Hits Australia Coast
Threat of Winterkill for US Wheat, also Fruit Damage

My personal portfolio - A position increased - Details and charts are in the Subscriber's Area.

Puru Saxena's Money Matters: Time to Buy Quality? - My thanks to the author for his ever-interesting strategy letter which is always a good read. It is posted in the Subscriber's Area but here is a brief sample from his energy section:

It is notable that in 2009, the IEA stressed the importance of oil for economic growth and concluded that 106 million barrels per day will be required by 2030; representing an increase of approximately 18 million barrels per day above current output. Interestingly, in last year's report, the IEA predicted that global production will peak at only 96 million barrels per day in 2035! So, within the course of a single year, the energy watchdog for the developed world lowered its production estimate by 10 million barrels per day!

To complicate matters further, the IEA's latest forecast of 96 million barrels per day of peak production depends on the assumption of finding an extra 900 billion barrels of oil over the next 25 years! However, given the fact that over the recent past, we have managed to discover only 10 billion barrels of oil each year, we cannot help but take the IEA's rosy forecast with a pinch of salt. Call us skeptics, but at the current rate of discovery, it will take us 90 years to discover 900 billion barrels of oil. Yet, the IEA somehow believes that this task can be accomplished by 2035!

My view - The cost of finding new sources of crude oil and extracting it continues to rise. The world is in a race against time to find sufficient sources of energy for our needs, which are increasing steadily despite more efficient usage. I do not doubt that our species had sufficient ingenuity for this challenge, but we were previously handicapped by complacency and overdependence on crude oil. (See yesterday's Comment for my preferred energy sector.)

Clive Hale's View from the Bridge: Where's my metal? - My thanks to the author for his interesting insights regarding gold, sandwiched between two epic quotes, which I reproduce without further comment:
"You have a choice between the natural stability of gold and the honesty and intelligence of the members of government. And with all due respect for those gentlemen, I advise you, as long as the capitalist system lasts, vote for gold."

George Bernard Shaw
"Gold has worked down from Alexander's time ... When something holds good for two thousand years I do not believe it can be so because of prejudice or mistaken theory." Bernard Baruch

Additional commentary by Eoin Treacy

Global food prices and CAP reform - This is an interesting article from EurActiv updated on September 20th 2010 which may be of interest to subscribers. Here is a section:

As global prices hit new highs, the European Commission sold its intervention stocks, removed the obligation to set aside 10% of arable land for the 2008 harvest, increased milk quotas by 2% and suspended import duties on cereals. The plan is to abolish set-aside forever, significantly reducing the role of market intervention, and to phase out milk quotas gradually between now and 2015. The EU executive also notes that "almost all remaining production-linked subsidies will be eliminated, so that farmers have complete freedom to produce what the market requires".

Furthermore, the Commission proposed policy measures aimed at improving market transparency (EurActiv 11/12/09). It decided to enhance monitoring of developments in agricultural markets and analyse the impact of price speculation. The EU executive also announced plans to investigate the functioning of the food supply chain for potential unfair commercial practices, which may be holding back competition and driving up prices.

A review of national and EU-level regulations that hinder the proper functioning of the food supply chain was also initiated, in an attempt to identify regulations that restrict the entry of new companies into the market, prevent business from fully competing and distort the relationship between suppliers and retailers.

The results, published in October 2009, highlight "significant imbalances" in contractual relations between actors in the food supply chain and a lack of transparency of prices along the chain (EurActiv 28/10/09). A European food price monitoring tool is being set up to increase transparency.

My view - In food as with energy policy there can be a number of competing aims which need to be balanced in order to satisfy all stakeholders. European agriculture needs to serve the needs of consumers, farmers, under developed regions, governments, the environment etc. In addition the restrictions imposed by the GATT negotiations are an additional concern.

One of the greatest injustices of the original Common Agriculture Policy (CAP) was that farmers were paid to produce food that was not needed. This created huge stockpiles and allowed the EU to sell grain on the international market at below cost. These actions artificially depressed food prices and stifled growth in many less developed countries.

The reform of the CAP means that subsidies are no longer linked to production. The introduction of direct payments means that farmers are now paid regardless of what they produce. The focus of subsidy has changed from food production to preserving a rural way of life and the environmental diversity of various countries.
This section continues in the Subscriber's Area.

From the field to the table - Thanks to a subscriber for this interesting report by Christina McGlone and colleagues at Deutsche Bank. The full report is posted in the Subscriber's Area but here is a section:

Looking around the globe, we see strong opportunities for U.S. exports of pork and wheat. Specifically, (1) widening hog spreads between the U.S. and China, (2) the foot-and-mouth outbreak in S. Korea, (3) the German dioxin issue, and (4) potential resolution of the trucking issue with Mexico should lead to continued strong U.S. pork exports. In our view, these developments are most positive for Smithfield. In pork, to the extent the entire benefit does not accrue to the hog farmer and pork processing margins are maintained, Hormel and Tyson will also benefit. However, value-added refrigerated/prepared foods margins will be more challenged. On the wheat side, continued reductions in the Australian wheat crop and a shift in quality toward feed wheat are reducing an already-tight supply of milling-quality wheat globally. The U.S. is quickly becoming the best source on milling quality wheat as Europe's supplies are depleted. In our view, this is a positive for Archer Daniels Midland, with milling wheat likely in storage. Bunge may also be aided by the emergence of new trade patterns.

commodity prices still riding high - where are the key risks?
Many key commodity costs continue to remain at elevated levels as we have moved into the new year. (Although soft chicken markets are helping mitigate inflationary pressures.) Most restaurant companies have now given their initial commodity outlook for 2011 with the consensus being commodity inflation in the range of 2-3%. This level of inflation should be manageable, assuming companies can take some pricing and assuming companies are not being overly optimistic about unhedged items (see SBUX). In this report, we've provided detailed commodity pricing trends, as well as company-specific exposures and outlooks for all major restaurant chains. However, parsing through this data to determine which companies have the most worrisome commodity exposure is not easy. To summarize, among our coverage, the companies with the most significant commodity risk include DRI, CMG and WEN.

My view - Food prices continue to make headlines so it is natural to think about the impact higher input prices may be having on restaurants and food processers. How much hedging they have engaged in and their ability to pass on costs to their customers will remain key to their earnings outlook and the market's perceptions.
This section continues in the Subscriber's Area.

Email of the day - on income oriented investments:
"I am a beginner in investments. Can you suggest some Dividend Aristocrats or long-term income giving investments? Thank you for your attention and for helping me."
My comment - Thank you for this question which others may also find of interest. Yield compression has been a major cause of concern for potential income investors. Quantitative easing has sent Treasury yields to record lows, many companies cancelled dividends following the Great Recession and many of those that didn't have experienced significant capital appreciation. As a result, the range of potential income investments shrank considerably over the last two years.
This section continues in the Subscriber's Area.

Email of the day (1 - 3) - on additions to the Chart Library:
"Could you please add this to your chart library: iShares S&P India Nifty 50 Index Fund INDY:NASDAQ. Thanks in advance."
"Please can you add ETFS Physical Tin (PHSN) to the library? Thanks"
"Thanks for a great service. I am a subscriber - through your service I got to know Patrick Cox at Agora and one of his current recommendations is NanoViricides (NNVC), I would appreciate if you could add it (I was unable to find it in your library).
"Also, I would greatly appreciate if you could add these instruments offered by UBS:
UBS (Lux) Equity Fund - Canada (CAD) 67821
UBS (CH) Equity Fund - Asia P 278870
UBS (Lux) Equity SICAV - Russia (USD) P-acc 2468721

UBS (Lux) Equity Fund - Greater China (USD) P-acc 547581"
My comment - Thank you all for these suggestions and for supplying the requisite identifiers. They have now all been added to the Chart Library.

The Chart Seminar
- The Sydney seminar is now full and 60% of our capacity for the Singapore seminar has also been booked. We have started a wait list for the Sydney seminar in case of any cancellations. Anyone interested in securing a place at any of our seminars should contact Sarah Barnes at [email protected]
The dates for all our seminars in 2011 are:

Singapore - April 28th and 29th
Sydney - May 3rd and 4th
London - May 19th and 20th
London - November 3rd & 4th
The full rate is £950 + VAT. The early booking rate of £875 for non-subscribers expires on March 17th for the Singapore seminar and March 24th for the Sydney seminar. Paid-up Fullermoney subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.

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