Morgan Stanley insolvent

This is all I could find following on to yesterday's rumours

Morgan Stanley is Insolvent – Only a Matter of Time Before Total Financial Collapse

Occupy Corporatism,

30 August, 2012

The fall of the House of Morgan has begun as stock prices on the global market at Morgan Stanley (MS) begin to fall on the New York Stock Exchange (NYSE).

According to Rick Wiles : “I’m hearing rumors that another major financial house is going to implode. In fact, the name I’ve been given is Morgan Stanley . . . It’s going to be put on the sacrificial alter by the financial elite.”

MS, technically speaking, is classified as insolvent based on mark-to-market valuation. By selling off non-core assets, MS has been able to “reduce its European exposure” through the manipulation of hedge funds and allocation of funds to failing financial corporations. Some mainstream media outlets tout that the Federal Reserve Bank will come in and assist MS in their insolvency and that MS “just isn’t going out of business anytime soon.”

However, on the bond market, MS is being treated like “a junk-rated company.” Moody’s the rating agency that sells their ratings to whomever will pay for a triple A score, have announced they will downgradge MS’ ratings which would put all US banks at risk.

Otis Caset, director of credit research at Markit confirms: “What has driven that, obviously, is Europe. The perception is — correctly or incorrectly — that Morgan Stanley is one of the U.S. banks most exposed to Europe’s problems.”

In 2008, with the first pre-meditated financial explosion , the cause for the bailout of the banks was a large sum of cash needed quickly to repay China who had purchased large quantities of mortgage-backed securities that went belly-up when the global scam was realized. When China realized that they had been duped into buying worthless securitized loans which would never be repaid, they demanded the actual property instead. The Chinese were prepared to send their “people” to American shores to seize property as allocated to them through the securitized loan contracts.

To stave this off, the American taxpayers were coerced by former President Bush and former US Treasury Secretary Hank Paulson. During that incident, the US Senate was told emphatically that they had to approve a $700 billion bailout or else martial law would be implemented immediately. That money was funneled through the Federal Reserve Bank and wired to China, as well as other countries that were demanding repayment for the fraudulent securitizations.

To further avert financial catastrophe, as well as more debt or property seizure threats by the Chinese, the Euro was imploded there by plunging most of the European countries into an insurmountable free-fall for which they were never intended to recover.

MS exposure to mortgage-backed securities and derivatives fraud may have finally brought the financial implosion to America. As Otis points out, it is the exposure to the Eurozone that was the nail in the coffin at MS. This only furthers the fact that financial collapse is imminent in America and the repercussions are already laid out.

However, this planned implosion of the mega-banks only serves to fit the global Elite’s plans.

John Paulson recently traded in his stocks for 4.53 million shares in SPDR Gold Trust (GLD) while investing deeper into NovaGold Resources.

George Soros has also sold his shares and interest in JPMorgan (701,400 shares), Goldman Sachs (120,000 shares), and Citigroup (420,000). He has reallocated these funds to gold.

The insolvency of MS means that the customer funds that are held in MS can be hypothecated (or co-mingled) by the bank into their funds to be used to pay off any loans or debts owed by the bank.

Earlier this month, on August 9th, the 7th Circuit Court of Appeals (CCA) ruled that BNYM can be moved to first in line of creditors over the customers that had their funds stolen by Sentinel Management Group (SMG).

Before SMG collapsed in 2007, Eric Bloom, former chief executive, and Charles Mosely, head trader of SMG stole $500 million in customer secured funds and were indicted because they exposed customer segregated funds to “highly risky derivatives.”

The SMG ruling means that the Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SPIC) regulatory systems will not insure customer funds, investments, depositors and retirees who hold accounts in banks.

In fact, the banking institution is now legally allowed to use those customer funds deposited as collateral, payment on debts for loans made, or free use on the stock market to purchase investments as the bank sees fit.

When a customer deposits money into a bank, the bank issues a promise to have those funds available when the customer returns to withdraw the deposited amount.

With the SMG ruling, those funds become property of the bank once they are deposited. If the bank is insolvent, under duress or filed bankruptcy, those customer deposited funds can be co-mingled with the bank’s funds and used for the purposes of the bank without recourse to the customer.

As explained in Readiness Exercise 1984 (Rex84) the end of the US dollar combined with civil unrest would cause the US government to declare martial law in order to preserve continuity of government.

Since 2010, all the mega-banks in the US have filed resolution plans with the Fed describing how to liquidate banking assets without causing further damage to a failing financial system. By selling “non-core assets” without upsetting shareholders while protecting the monetary system, taxpayers and creditors is the work of the mega-banks who have contributed solely to the destruction of the global financial markets.

Both Bank of America and Citibank have already begun liquidity with the sale of their non-core assets proving that these two financial institutions are insolvent. Add to this list MS.

While mega-banks are unloading their assets under duress, they are acquiring smaller banks and keeping their names to fool the American public into thinking they are banking with an independent as they consolidate financial power in the US.

In response to the coming implosion, the Federal Reserve Bank is inventing electronic fiat. This keeps the Ponzi scheme going. On the surface it all appears to ok. However, undercover and out of the general public’s sight, the manipulation of insurance rates, market values, mortgages are directly contributing to the complete banking system collapse.

An estimated 70% of some of the mega-bank’s worth is provided by the government by subsidies; meaning that without the money provided by the US government, these banks would go under tomorrow. And by watching the financial climate as it is emerging, it appears that we are witnessing just that.

Combined with the solicitations of the Department of Homeland Security (DHS) for 1.8 billion rounds of hollow point bullets, 1400 pounds of highly dense explosives material and urban warfare drills being conducted across the nation, it is clear that this insolvency of MS is one more proof that marital law coinciding with financial collapse is dangerously close.

From Guy McPherson

Guy is saying everything that I feel at the moment.  Every bit of information that comes our way is worse than what came before.

I always remember a Russian friend who said years ago: "Optimism is the absence of realism"

What are we fighting for?

Guy McPherson

Guy McPherson,

30 August, 2012

In my latest essay in this space I mentioned two phenomena worth fighting for: the living planet and freedom based in anarchy. I surrender. I no longer believe the struggle matters on either front.

I no longer think we’ll save the remaining shards of the living planet beyond another human generation. We’ll destroy every — or nearly every — species on Earth when the positive feedbacks associated with climate change come seriously into play (and I’ve not previously considered the increasingly dire prospects of methane release from Antarctica).

The climate-change data, models, and assessments keep coming at us, like waves crashing on a rocky, indifferent beach. The worst drought in 800 years in the western United States is met by levels of societal ignorance and political silence I’ve come to expect. I would be stunned if this valley — or any other area in the interior of a northern-hemisphere continent — will provide habitat for humans five years from now. And climate change is only part of the story.

My trademark optimism vanishes when I realize that, in addition to climate chaos, we’re on the verge of tacking on ionizing radiation from the world’s 444 nuclear power plants. When we choke on our own poison, we’ll be taking the whole ship down with us, spewing a global blanket of radiation in the wake of collapse. Can we kill every single species on Earth? Apparently we’re willing to give it a try, and I will not be surprised by our “success” at this omnicidal endeavor.

Onto anarchy. Few people understand what it is, and even fewer support it. As a product of cultural conditioning, the typical American confuses anarchy with terrorism. Considering the near-term exit ofHomo sapiens from this planet, it seems a bit ridiculous of me to express concern about living outside the absurdity that has become mainstream.

Color me non-judgmental. Continue to fuck the planet and our future, and see if I give a damn. Minor efforts to sound the alarm, including my own, fade to insignificance when compared to the juggernaut of global imperialism. These efforts have long been irrelevant; it’s my awakening that is new.

And color me sad, of course, at the societal path we’ve taken. Swept up in the pursuit of more instead of better, we’ve become the waves approaching the rocky shore.

We had an opportunity to return to our tribal roots, as others have done when civilizations collapsed. Consider, for example, the survivors from the Olmec, Chaco, and Mimbres cultures, all of whom chose tribalism when civilization failed. Tribalism worked for two million years in a diverse array of situations. It worked before and after civilizations arose in specific regions. For many decades, our version of civilization has been successful only for a few individuals of one species, yet we keep tinkering with the system long after it’s failed.

Despite considerable evidence to the contrary, we’ve come to believe industrial civilization is the only way to live. As we’ll soon discover, it’s the only way to die, at least at the level of our species.

Inspired by Kurt Vonnegut’s eponymous poem, I offer the following Requiem for Earth.

If Earth could sing with a female voice.
Her strength would be evident, though her tone might waver.

Could she withhold judgment against one of her own,
through all we’ve done to her, and our brethren?

We lived in her bosom from which we were born
for two million years not forsaking our home.

Then we became something different from all we had known,
and in the gasp of a breath we destroyed it all.

Can you blame her for judging us, considering what we’ve done?
She gave us every chance to turn it around.

Now we’re all done and she’s endured our abuse,
including pillage, plunder, and rape without any excuse.

All she can sing in that mournful tone is sorrow for the power she unleashed,
through us and thus dispassionately onto herself, destroyed by one of her own.

She must ponder how our hubris overwhelmed our humility
in concluding about our recent selves: They didn’t like it here.

Dr. William Rees - originator of the "ecological footprint"

Why We're in Denial

Dr. William Rees is a professor emeritus at the University of British Columbia and former director of the School of Community and Regional Planning (SCARP). He is the originator of the "ecological footprint" concept and co-developer of the method. In this interview he speaks with us about why we're in denial about the failure of the human enterprise. We ask Bill about the reasons we're in denial and how we could start adapting to our ecological challenges through a new cultural narrative

[ Bill Rees // Why We're in Denial ] from Extraenvironmentalist on Vimeo.

George Monbiot on insanity

George has his own areas of denial (one might say madness) – such as embracing nuclear power and entering the world of Peak-Oil denial – but I can't fault him for these sentiments. I have no doubt of his good intentions.

The day the world went mad

As record sea ice melt scarcely makes the news while the third runway grabs headlines, is there a form of reactive denial at work?

George Monbiot

the Guardian,

29 August, 2012

Yesterday was August 28th 2012. Remember that date. It marks the day when the world went raving mad.

Three things of note happened. The first is that a record Arctic ice melt had just been announced by the scientists studying the region. The 2012 figure has not only beaten the previous record, established in 2007. It has beaten it three weeks before the sea ice is likely to reach its minimum extent. It reveals that global climate breakdown is proceeding more rapidly than most climate scientists expected. But you could be forgiven for missing it, as it scarcely made the news at all.

Instead, in the UK, the headlines concentrated on the call by Tim Yeo, chair of the parliamentary energy and climate change committee, for a third runway at Heathrow. This sparked a lively debate in and beyond the media about where Britain's new runways and airports should be built. The question of whether they should be built scarcely arose. Just as rare was any connection between the shocking news from the Arctic and this determination to increase our emissions of greenhouse gases.

I wonder whether we could be seeing a form of reactive denial at work: people proving to themselves that there cannot be a problem if they can continue to discuss the issues in these terms.

The third event was that the Republican party in the United States began its national convention in Tampa, Florida – a day late. Why? Because of the anticipated severity of hurricane Isaac, which reached the US last night.

As Kevin Trenberth of the National Centre for Atmospheric Research,noted earlier this year:

"Basic theory, climate model simulations, and empirical evidence all confirm that warmer climates, owing to increased water vapor, lead to more intense precipitation events even when the total annual precipitation is reduced slightly … all weather events are affected by climate change because the environment in which they occur is warmer and moister than it used to be."

(h/t: Joe Romm at Climate Progress)

The Republican party's leading lights either deny climate change altogether, or argue that people can adapt to whatever a changed climate may bring, so there's nothing to worry about.

The deluge of reality has had no impact on the party's determination to wish the physical world away. As Salon.com points out, most of the major figures lined up to speak at the convention deny that man-made climate change is happening.

When your children ask how and why it all went so wrong, point them to yesterday's date, and explain that the world is not led by rational people.

www.monbiot.com

Coal - a deteriorating market

Losses for NZ's state-owned coal mining company meaning significant job losses following the Pike River mining disaster

Writedowns push Solid Energy to $40 mill loss

TVNZ,

31 August, 2012

Writedowns on the value of its underground coal mines, renewable energy projects and experimental underground coal seam gas plant have pushed Solid Energy to a $40.2 million loss, although underlying earnings after tax were 16% higher than the previous year.

The $99.2 million underlying earnings figure excludes $151.7 million of writedowns and was described by outgoing chairman John Palmer as "good in a deteriorating market."

The company is using the writedowns, based on slumping global coal prices, to justify as many as 370 job losses at its Huntly East and Spring Creek underground mines, and in other parts of the business, including head office.

The restructuring was announced Wednesday, ahead of today's profit release.

The government has already signalled that Solid Energy, one of five SOEs slated for partial privatisation, is off the list for a share float while it works to get back on track financially. But Palmer said this showed why Solid Energy should be partially privatised.

"It's ironic, given the issues around Solid Energy today is that if you wanted the best reason for partial privatisation, then the commodity nature of the business and its dramatic turnaround in fortunes is the very best reason."

Such a risk profile was "unsuited to total Crown ownership," said Palmer, expressing "some regret" at leaving the Solid Energy board after six years as the company faces a difficult couple of years.

While revenues for the year increased 18% to $978.4 million, that was partly because coal due for shipment from Lyttelton Port before the end of the last financial year were delayed by the June 2011 earthquakes.

Earnings before interest, tax, depreciation and amortisation were just $44.9 million for the year to June 30, a 78% drop from the previous year's $200.8 million.

The result is also well shy of broking house Forsyth Barr's $204.4 million ebitda forecast, prepared last November for the Treasury's Crown Ownership Monitoring Unit, which oversees the performance of state-owned businesses.

While the company has not released audited accounts to back today's profit announcement, a simplified financial results table also shows that gearing has rising to 42% from 30% a year earlier, reflecting $250 million of capital expenditure over the last four years.

Solid has cancelled some $100 million of capex for the current financial year.

Palmer said the company's financial situation would be "challenging and is worse than during the 2008 global financial crisis."

"In 2008-09, when US dollar export prices collapsed, the New Zealand dollar followed. Coal prices rebounded relatively quickly in the following year, whereas this time, with a high New Zealand dollar, we expect prices to be weak for a prolonged period."

Today's statement also makes explicit that the state-owned coal miner will spend no further money developing renewable energy options.

"The company has made a significant investment developing renewable energy businesses," said Palmer. "The harsh reality is that other fuels are far more competitive in the current financial environment. We took a long run of these businesses, which relied on a sustained price premium which has largely failed to materialise."

As a result, the company is selling its bio-diesel business, which it has written down from $17.7 million to $8.7 million, and its Nature's Flame wood pellet burner fuel manufacturing unit from $37.5 million to $13 million.

The book value of the Spring Creek mine has almost halved from $137.3 million to $73 million, while Huntly East, on which major capital expenditure has been cancelled, sees its book value fall by $33.8 million to $32.1 million.

Solid is also writing off the $18.5 million it spent developing an underground coal seam gas unit at Huntly, although it intends establishing new UCG operations in larger coalfields in Taranaki as part of its turnaround plan.

A further $22 million of on-off costs were also declared, including $9.5 million on the value of Spring Creek stores and Nature's Flame inventory and onerous contracts.

On top of that, there was an after-tax impact of $9.1 million, caused by backing out tax losses relating to Spring Creek, which the balance sheet restructuring cancels out.

Chris Martenson on the US drought

The U.S. Drought Is Hitting Harder Than Most Realize

Repercussions are everywhere

by Chris Martenson.

Peak Prosperity

29 August, 2012

This is an important update on the U.S. drought of 2012, the combined record-setting July land temperatures, and their impact on food prices, water availability, energy, and even U.S. GDP. 

Even though the mainstream media seems to have lost some interest in the drought, we should keep it front and center in our minds, as it has already led to sharply higher grain prices, increased gasoline costs (via the pass-through of higher ethanol costs), impeded oil and gas drilling activity in some areas (due to a lack of water), caused the shutdown of a few operating electricity plants, temporarily reduced red meat prices (but will also make them climb sharply later) as cattle are dumped in response to feed- and pasture-management concerns, and blocked and/or reduced shipping on the Mississippi River.  All this and there's also a strong chance that today's drought will negatively impact next year's Winter wheat harvest, unless a lot of rain starts falling soon. 

The good news from Hurricane Isaac is that he's traveling on a perfect path to deliver relief to one of the most heavily drought-impacted areas:

There are steps that everyone can and should take to become more food- and fuel-resilient in case the drought persists – as some experts think is quite possible – into next year and perhaps a few more. We'll get to those steps shortly.

Further, there will be a definite impact to U.S. GDP, which could add to pressures (excuses?) that the Fed may use to justify additional quantitative easing (QE) measures (otherwise known as 'printing more money'). 

U.S. Drought Intensifies

The drought in the U.S. has intensified in the recent weeks, even though it has somewhat dropped from the front pages of mainstream media, possibly because the story is stale or possibly because it's just too serious to dwell on for long:

Extreme drought in the U.S. intensifies

Aug 17, 2012

The drought in the United States is continuing to intensify, according to the National Oceanic and Atmospheric Administration (NOAA).

The latest Drought Monitor says 61 percent of the contiguous United States faces moderate or worse drought conditions this week.

Nearly 30 percent is experiencing extreme to exceptional drought, exceptional being the most severe category.

Officials say the amount of land that's currently affected across the U.S. is larger than the entire state of California.

In this next image, it is notable that the areas of the highest drought classification -- 'exceptional' -- have dramatically expanded from the prior week (the August 7, 2012 report).

(Source) 

Much of the drought is centered squarely over the U.S. 'breadbasket' region and has really dented this year's harvests in a big way.

Crop Losses

Certainly the number one story around the U.S. drought centers on its impact on grain production, specifically corn and soybeans.  In a minute we'll discuss the other impacts, but we'll start with the one that has the greatest potential to cause both suffering and strife over the coming months (and possibly years), especially for those on limited budgets.  

In 2011, the U.S. reaped a corn harvest of some 314 million tons.  In 2012, the USDA has estimated a harvest of 274 million tons – a shortfall of 40 million tons – despite record acreage being planted.

While the USDA has been steadily reducing their crop estimates, practically with every passing week, it seems likely that the USDA remains behind the curve today, as it has been every step of the way. A different source for information comes from the Pro Farmer Midwest Crops Tour, which is coming in slightly under the current USDA estimates:

Crop Tour Points to Sharper Drought Impact on Soy, Corn

Aug 21, 2012

Initial reports from the closely watched Pro Farmer Midwest Crop Tour suggested more crop damage than expected from the drought, raising the potential for diminished soybean production this fall and sending futures sharply higher.

The disappointing crop reports from scouts touring fields on the Pro Farmer crop tour in states such as Ohio and South Dakota make it hard to believe soybean yields will reach current U.S. government crop projections, said Don Roose, president of advisory and brokerage firm U.S. Commodities in West Des Moines, Iowa.

The market is in the "watch and worry" mode on all fronts as shrinking crop forecasts will further tighten supplies already projected to dwindle to precariously tight levels in 2013, Mr. Roose said.

On the annual Pro Farmer tour, analysts and investors walk corn and soybean fields in seven Midwestern states over four days to assess prospects prior to the fall harvest. Pro Farmer is an agricultural advisory firm. The Pro Farmer tour, which wraps up Thursday, reported diminished potential for the soybean crop in both Ohio and South Dakota.

The crop tour doesn't estimate soybean yields, but it reported an average 584.9 pods per 3-foot-by-3-foot square area in South Dakota, down 47% from a year ago. In Ohio, scouts reported soybean counts at an average of 1,033.72 pods per 3-foot-by-3-foot square area, down from 1,253.2 pods a year ago.

Soybeans entered their critical growing phases in recent weeks, and the crop has benefited in some regions from recent rains across the eastern Farm Belt.

Meanwhile, scouts with the Pro Farmer Midwest Crop Tour on Monday reported an average estimated corn yield in Ohio of 110.5 bushels per acre, down from the tour's estimate of 156.3 bushels a year ago. In South Dakota, tour scouts reported an average yield estimate of just 74.3 bushels per acre, down from 141.1 bushels a year ago.

While commodities traders and agronomists have braced for weeks for the prospect of a crop decimated by drought, the estimates were lower than many had expected.

The summary here is that the Pro Farmer Tour is reporting crop yields to be 2% - 3% lower than current USDA forecasts, which is a big deal when it comes to food.  We're talking a few tens-of-millions-of-bushels' difference.

The somewhat sour note in this unfolding drama is the fact that 40% of the nation's corn crop goes to ethanol producers, which means that food will be burned in the nation's auto fleet instead of helping to keep prices down for consumers and animal feed.  Another 40% goes to animal feed (chicken, cattle, hogs, etc.), and the remaining balance goes to direct human consumption. 

However, the ethanol mandate is a congressional requirement for our fuel blenders, so they do not have a choice in the matter.  It would literally take an act of Congress to even temporarily suspend the ethanol requirement – and in an election year, that's just not going to happen, given the powerful constituencies invested in preserving that mandate.

Of course, higher input costs will ripple through the entire chain, so perhaps Bernanke will get the inflation he seeks, although it won't be the one he wants.  The inflation he wants is simple monetary-driven inflation.  The inflation he will get is nothing more than a supply/demand mismatch.

Still, the USDA has a handy calculation for estimating the future impacts:

U.S.’s inferior corn crop has supply-chain ramifications

Aug 13. 2012
The USDA has provided considerable information about how the drought’s effects were likely to percolate through the economy. Because of a smaller-than-expected corn crop, the USDA said it can make the general prediction that “we will see impacts within two months for beef, pork, poultry and dairy (especially fluid milk). The full effects of the increase in corn prices for packaged and processed foods (cereal, corn flour, etc.) will likely take 10-12 months to move through to retail food prices.” 

The USDA has a formula for predicting changes in the rate of inflation caused by gains in prices at the commodity level: if the farm price of corn rises 50%, retail food prices rise by 0.5% to 1% as measured by the Consumer Price Index (CPI).

The price of September corn futures from mid-June until early August advanced 55%, meeting the USDA’s criterion for a measurable increase in the CPI Lapp presented a more extreme scenario than the USDA.  He predicted that the damage to the 2012 corn crop will translate into a food inflation rate of 4% to 5% in 2013. In his view, the dollar cost of the drought already was $30 billion, which accrued rapidly over the summer. 

“This is a cost that somebody has to bear,” Lapp said. “Some price hikes are fairly quick and others take a while.” 

He said high feed costs will have to be absorbed by producers, who will likely liquidate part of their cattle and swine herds and poultry populations. At the retail level, the drought’s effects will translate into narrower margins — and expected higher prices — for processed food and soft drink manufacturers among others. 

Lapp offered his opinion that legislation that has effectively required 40% of the corn crop be used in making biofuels has made everything worse.

“The situation has been aided and abetted in a negative way by the biofuels mandates,” he said.“Shame on us for having mandated so much to corn ethanol” without creating contingencies for a bad crop year. 

Because corn is the base unit for so many things (especially in the form of high-fructose corn sweetener), and because it's a primary feed component for finishing cattle and raising chickens and hogs, it tends to have a pretty decent impact on food prices.

However, it takes time for those price hikes to work through the system. So it will not be until 2013 sometime that we really begin to feel it in the U.S.  And for the rest of the world that lives more directly on grains?  They're not as lucky.  The price hikes hit them almost immediately.

It looks like the harvest in Russia will be below expectations as well:

Russia harvest forecasts cut as drought hits crop in east

Aug 20, 2012

(Reuters) - Two leading Russian agricultural analysts cut their forecasts for Russia's grain harvest on Monday after harvest data from two drought-stricken eastern growing regions reduced the outlook for the overall crop.

SovEcon narrowed their grain forecast to 71-72.5 million metric tonnes (...)

The government's official grain harvest forecast is 75-80 million tonnes, of which 45 million tonnes could be wheat. The government has put this season's exportable surplus at 10-12 million tonnes, a level seen by traders as an informal cap on exports.

The government has tried to reassure markets there will be no repeat of August 2010, when Russia's government shocked markets with a snap decision to ban grain exports when the scale of losses from major drought became clear.

The government has indicated that protective tariffs could be an option, though only after the end of the calendar year.

But traders widely expect limits to be imposed in some form, perhaps as early as November, after heavy exports in the early months of the season showed Russia could hit the 10-12 million tonne mark sooner than January.

Russia is still officially projecting 75-80 million tonnes but may only get 71 tonnes.  If the projected exportable surplus is 10-12 million tonnes, but Russia actually harvests 9 million tonnes less than their hoped-for projection, then its exports will have to decrease to plug that gap.

Here's the kicker: Russia has already exported a good deal of that amount. That is, the prospect of another Russian export ban this year is quite realistic. If we get one, then we can expect a repeat of the turmoil in the grain markets that we saw in 2010.

But there's another much more fundamental reason why we can expect higher prices going forward.

Need for Even Higher Prices

The good news is that there's still plenty of supply to carry us through to the next harvest.  However, demand is going to have to go down some, and the way we accomplish that is through the price mechanism. 

Right now, physical grain traders are saying that prices are too low and that unless they rise, we're going to run out of grain before the next harvest.  Obviously, that's not truly going to happen – increasing scarcity will cause prices to rise until current demand levels are reduced.

Fall in corn price disguises real picture

Aug 20, 2012

Corn prices surged this month to an all-time high of $8.4375 a bushel on the back of the worst drought in the US in nearly half a century. But prices have since fallen roughly 5 per cent. The impression is the rally has run out of steam.

This is far from the real picture.  Prices need to rise again – probably setting all-time highs – to dampen consumption that is running ahead of supply.

If demand does not slow down, silos will be all but empty before the next harvest arrives in late 2013.

On paper, the balance sheet for corn supply and demand published by the US Department of Agriculture seems good enough. But in practice, the numbers look a bit shaky. The agency, whose figures are closely watched by the market, first estimates supply and, after that, adjusts the demand data to maintain a minimum level of inventories.

This time the USDA is asking for monumental rationing on the demand side. For example, US corn feed and export demand will need to drop to their lowest levels in nearly 20 years.

The USDA is also forecasting lower ethanol production – and thus corn demand. Ethanol output has fallen, but not nearly enough. Worse, the rise in wholesale petrol prices back above $3 a gallon means that ethanol producers are profitable again, even when paying record corn prices.

Corn is now trading just above $8 a bushel – but traders in the physical market say that prices need to rise to $9-$10 to force demand down enough to meet the consumption levels anticipated by the USDA.

The retreat in corn prices over the past couple of weeks has given inflation watchers a false sense of security. The market should not relax, however. More food inflation is just waiting around the corner.

The idea here is that the cash market will have to lead the futures market higher, an odd situation because it is usually the other way around.  With so many hedge funds now playing in the commodity space, one explanation is that they are simply playing paper games with each other – those playing the short side will get a lesson in the importance of keeping one eye on reality.

A truly shocking event would be if the U.S. ever gets to the position of limiting exports of corn or even soybeans.  That is a very unlikely proposition to consider, but if the silos get drained because we have dysfunctional markets that saw fit to keep prices bizarrely low while our free trade agreements allow the too-low grains to be exported, threatening domestic supplies, then that possibility notches up a little bit.

Dairy, Meat, and Even Higher Gasoline Costs

While it is clear that basic grain prices are heading higher, the knock-on effects into other soft commodities are a little less clear, but are definitely still important to consider. 

The most obvious of these are higher grain feed costs that will hit both livestock and dairy producers especially hard:

The withering crops are translating into higher feed costs for livestock producers. "This is different than anything I've ever experienced," said Kent Pruismann, who raises cattle and hogs on a farm in Sioux County, Iowa, and saw his costs for feed jump by 20% in July.

The higher corn, soybean and wheat prices will reach food makers, exporters and eventually consumers. Drivers already have seen fuel costs climb because of higher prices for ethanol, a corn-based fuel that is blended into gas. The drought also has reignited the debate over whether ethanol production is a drain on global food supplies.

(Source)

Some are already turning to, shall we say, other means to keep their herds fed:

Kentucky cows eat candy instead of corn

Aug 14, 2012

LOUISVILLE, KY (WAVE) – When you think of cattle feed, you probably don't think of candy, but due to the drought that's exactly what one farmer chose to do.

At Mayfield's United Livestock in Western Kentucky, owner Joseph Watson feeds his herd second hand candy.

Watson started feeding his cattle the candy because corn prices were so high.

He mixes the candy with an ethanol by-product and a mineral nutrient. He monitors the daily intake and said the cows have had no real health issues.

Yes, the higher grain costs are going to hit everything from big cattle feedlot operations to my own two-bags-a-month chicken-feed usage.

However, it will be the cost of and even lack of hay that will really create some big problems later this year.  The drought not only harmed the range and pasture lands, forcing greater use of stored hay to offset the decline in forage, but it put a huge crimp in this year's hay production:

Drought Cripples Hay Feed Industry

Aug 19, 2012

Widespread drought has scorched much of the pastureland and hay fields needed to sustain cattle herds in the U.S., forcing many ranchers to find feed alternatives or sell their animals early into what has become a soft beef market.

The shortage has led to higher hay prices, with some farmers saying they have to pay two to three times last year's rates.

Despite farmers setting aside more land to grow hay this year, they are still producing a lot less because of the drought, according to a recent Department of Agriculture estimate.

The harvest of alfalfa, generally considered to make the best hay because of its high nutrient levels, is forecast to be the worst since 1953, according to the USDA.

Pasture grass and hay are what most cattle are fed for the roughly two years they live before being slaughtered, but the drought is threatening to starve the animals.

Illinois rancher Steve Foglesong said that most years he could graze his cattle from spring through November on verdant fields that are now brown, buying them hay bales only in the winter. This year, he and his animals have their eyes on withered corn plants.

"It may not have any ears on it, but it makes pretty good cow feed," he said.

John Erwin, who owns 20 acres of land in Shelbyville, Ill., said he is having trouble growing alfalfa hay, but demand is strong for what he can produce.

"I'm getting calls from ranchers as far away as Wyoming," Mr. Erwin said. "They're desperate."

He said he has been offered $250 a ton for his hay, nearly double the $130 a ton in a non-drought year. His fields didn't produce any hay in July.

A doubling of hay prices is obviously going to create quite a bit of economic hardship for many farming operations, which tend to be marginal profit businesses even when everything is going well.

Here's another view on the hay situation:

I spoke with Caldwell [of Indiana horse rescue] and a number of other horse-rescue organizations around the country by telephone this week. The relentlessly hot dry weather, amplified in many areas by wildfire, has been devastating to farmers, ranchers and other horse owners.

“Everybody is using their winter hay now. The pastures are destroyed and they probably won’t recover before winter,” said Caldwell. “The price of hay has doubled, and the availability is down by 75 percent.”

Caldwell is somewhat sanguine about his own lot, but not optimistic about what lies ahead.

“Today the problem is not nearly as bad as it’s going to be,” he told me. “It’s terribly bad today, but it is going to get a lot worse.”

(Source)

The drought has done some very serious harm to the nation's hay supply that goes beyond the economics of higher hay costs.  First there's the supply of the hay, and then there's the relatively poor quality of hay that was taken from non-irrigated, drought-stricken fields.  All in all, it's not a good situation. 

To add a bit more difficulty into the situation, it turns out that drought-stricken silage and even the corn itself can be harmful to animals:

Drought makes corn dangerous for livestock

Aug 16, 2012

COLUMBIA, MISSOURI, U.S.  — Tim Evans, an associate professor of veterinary pathobiology and toxicology section head at the Veterinary Medical Diagnostic Laboratory at the University of Missouri College of Veterinary Medicine, Columbia, Missouri, U.S., warns U.S. farmers and livestock producers that drought-damaged corn plants can pose a risk to animal health.

“During severe drought conditions, corn plants, especially those heavily fertilized with nitrogen, can accumulate a chemical called ‘nitrate’,” Evans said.

“This chemical can be very harmful to animals, especially cattle, if they eat corn plants or other vegetation containing too much nitrate. Eating plants with too much nitrate can cause damage to red blood cells, resulting in lethargy, miscarriage, and even sudden death.”

Evans says that in normal conditions, corn crops typically absorb nitrate into only the lower 12-18 inches of the stalk, which does not have to be fed to animals. However, during severe drought conditions, high concentrations of nitrate can accumulate in the upper portions of the stalk, which cattle and other livestock often eat.

Evans also says that many naturally growing plants and weeds in grazing pastures can accumulate nitrate during drought conditions, as well. These plants include many types of grasses and some weeds, which animals might be forced to eat because of limited pasture or hay available as forage for livestock. 

The key here is that nitrates are safe below 2,000 ppm but toxic above 15,000 ppm, and the levels found in the stalks and how high it travels are a function of whether enough rain fell to allow the plant to take it up.  Much of the corn crop was so desiccated that the plants could not even manage to draw up this nutrient, and therefore it is safe as a feed product.

While it's hard to get a read on at this early stage, there are enough warning signs here pointing to much, much higher grain, food, and meat prices in the future.  The worry is whether there will even be enough feed to sustain the animal populations through the Winter and Spring. Given the damage to the harvestable corn, a lot of it is going to be turned into silage

Many ranchers and farmers are faced with a horrible choice here.  Saving their herds may be economically unsound or even impossible where hay and safe silage are not available, and so they are selling their herds, one of the most heart-wrenching decisions anyone could have to make.

So many are doing this that recently the price for cattle has dropped, as everyone is selling into an increasingly soft market.  My advice is to enjoy these low meat prices while they last, because the next stage of this story involves much higher meat prices.

The problem with understanding just how bad the hay situation might (or might not) be is that there are no national statistics collected that could tell us whether or not there's even enough hay available to sustain the current commercial and recreational livestock populations. 

The Importance of Positioning Yourself

So, with all of these repercussions building during the current drought – to which there's yet no end in sight – what can you do today to minimize their impact on your budget and lifestyle?

Part II: Positioning for the Drought's Aftermath looks at the likeliest outcomes in food prices, food availability, energy prices, and macroeconomic consequences (of which there will no doubt be many from this drought). We have a national food distribution system that runs significantly on a just-in-time basis, which leaves it vulnerable to price and inventory shocks when there are supply disruptions. The reduced water levels caused by the drought are handicapping electrical power generation in growing regions in the country; electrical thermal plants are the number one biggest user of water in the U.S.  The global financial markets are similarly tenuous these days, as resources are already taxed in trying to stimulate the moribund U.S. economy and dig Europe out of its massive credit woes.

This is one of those moments where taking simple, prudent steps now can have an outsized effect on preserving your quality of life. 

Click here to read Part II of this report (free executive summary; paid enrollment required for full access).