Global Economic Recovery or Chinese Stockpiling of Commodities?

To continue the blog thread here about the significance of the performance of the Baltic Dry Index, here are some excerpts from "Where's the Economy Headed? Insiders Watch This Key Index", Published: Wednesday, 26 Aug 2009, By: Jeff Cox, CNBC.com .

For some analysts, the shipping index's plunge is indicative that the slowdown in demand for shipping will mean more troubles for the US economy, despite its recent signs of growth that have led some to call the recession over. Thus, the increasing popularity of the BDI as a yardstick.   "The reason it's becoming more popular is it has been a very accurate indicator of recessions," says Tony Sagami, editor of Weiss Research's Asia Stock Alert newsletter.

Sagami sees the BDI drop as showing a fall in metals prices, which generally portends an economic slowdown; signal of a short-term correction in the Chinese markets; and a sign that the global economy remains in trouble.  "The US is headed for a Japanese-style recession," says Sagami, who recommends investors increase cash positions.

The rise in the U.S. stock market off it's scary March lows has been nothing short of phnenomenal.  Much of the increase that's been hailed as so promising is the bounce back of a lot of commodities, mostly not the agricultural kind, soybeans being an exception. Anyone could have thrown a dart at a group of steel stocks and had themselves a winner from April to August.  But is the rise in price of steel, copper, and other various hard commodities sustainable? 

As far back as at least June it was noted that China was actually stockpiling commodities, rather than buying them up for use in the normal course of the business of their once bustling economy. 

"Commodities and shipping executives describe Chinese stockpiling in recent months of a range of other commodities as well, including aluminum, copper, nickel, tin, zinc, canola and soybeans. Starting in April, China began stockpiling significant quantities of crude oil."  (Kieth Bradsher, The New York Times, June 2009)

There is lots of speculation as to why China is stockpiling these basic essential commodities.  The scariest reason proposed is that this hoarding of economic essentials is in anticipation of a drastic collapse in the value of the Dollar.  In effect, it is China's way of hedging against a possible collapse of the dollar.  If China, the largest foreign holder of our national debt, deems it prudent to hedge against the collapse of the dollar, it would be wise for the individual investor to take note and take care to have themselves hedged against the very real possibility.

But back to the Baltic Dry Index.  If you look at the chart of the BDI you see a blip upwards beginning early April and beginning to falter by the end of June, marking the beginning of a downward trend that continues today.  Despite this, the  Dow continued it's phenomenal run upwards, with only one barely noticeable blip down in July.  The HangSeng index on the other hand began a downward move toward the end of July, the beginning of which correlates well with that tiny little July blip down of the DOW.  Which market is living in the real world?  Your guess is as good as mine.

China's commodity stockpiling materially contributed to that blip up in the BDI.  Essentially, that makes it an articifical blip upward -- not a rise in shipping traffic and freight rates due to 'normal' rising global demand indicative of a recovering world economy.

The Agricultural Economy and the General Economy are Inversely Related

Thanks to an article written by Stu Ellis, University of Illinois, here is an answer to the puzzle of why the stock market is rallying on perceived economic recovery but the agricultural sector, including commodities and live cattle, is lagging or worse. The following are excerpts from his interview with Kansas State Economist Allen Featherstone:

Featherstone says the farm economy and the general economy do not always move together, since the linkage is an inverse one that has farm income low when the US GDP is higher. He points to the relationship between the US stock market and the Illinois corn price and says the correlation has been nearly neutral since 1960, "Therefore, while the general U.S. economy may be slow there appears to be little long term evidence that there will be major spillovers into the U.S. farm economy. In fact, based on history, it is more likely that the agricultural economy and the general economy are inversely related."


The Kansas State economist says the overall strength of the farm economy is as strong as it has been in nearly 20 years and . . . if farm income remains high, so will land values, but if incomes fall, there is a good chance for declines in land values, and he says USDA forecasts have a lot of uncertainty about future farm income.


Given Featherstone's warning about declining farm income and land prices, does he think farm income will drop? He says US agriculture has been reliant on trade, but the trade surplus agriculture enjoys will decline more than 50% this year due to reduced overseas demand. That will impact different commodities and will impact farmers who produce those commodities, "A reduction in agricultural exports may lead to a building of commodity surpluses (stocks) and a reduction in crop prices and ultimately net farm income." And he says the two prior "busts" in the land market were caused in part by a softer global demand for US farm products.

Featherstone inadvertently provides part of the answer to why the Baltic Dry Index, normally a leading forward indicator to a period of rising economic bliss, has actually lagged markedly behind the current stock market rally. Featherstone indicates there has been a more than 50% decline in overseas demand for our commodities 'this year', and all those commodities would have been transported on various types of ships to many foreign ports. If demand for basic commodities produced in the USA remains 50% and more below normal, that would necessarily have a continuing material impact on freight rates as measured by the Baltic Dry Index.


While Featherstone doesn't address where he sees demand for our commodities in the coming year, the tone of the interview is on the negative side for a rapid global recovery and increased demand for our commodities in the coming months.


Click the blog title link above for the full text of the8/26/09  article by Stu Ellis.

Small Feedlots Up for Sale - Beef Demand Down 9%

Reconciling the up beat stock market returns of the last several weeks with any sort of economic reality just gets harder and harder. The American consumer is supposed to be looking at things from a positive perspective now and voila' the economy of the USA will be booming within the year. Or not.

The Baltic Dry Index (BDI), a reflection of demand for ships carrying a wide variety of materials and finished product to all ports around the world, is barely tug tugging ahead from its unprecedented lows of 2009. The BDI generally is something of a leading indicator to either rallies or routs, but not so in this current dazzling stock market rally.

Basic agricultural commodities are somewhat mixed, but as a whole generally are not far off their average basket price in 2007 prior to the last huge run up in oil, as reflected in the chart of DBA, an agricultural commodities ETF that reflects a basket of sorts of primary ag related commodities.

For the rancher with hungry bovines to feed, that's good news. We don't wish to see commodities prices jump up along with this crazy market. But then there's that inflation question? Just how will the expected gross inflation from irresponsible government spending and massive debt impact the price of commodities?

Not having the smarts to answer that question myself, I'll avoid it here. There are ample analysts with educated opinions about the direction of basic commodities in a staggering inflationary economy. I'm actually most curious as to why commodities have managed to stay out of the current rally, given that their basic demand is driven by the consumer and of course ethanol producers, whose business in turn is driven by basic consumption.

As I mentioned, for the cattle rancher, it's good news that so far commodities have at least maintained their average back track to 2007 levels, we have those hungry bovines to feed after all. What is really interesting to observe is that COW futures are tracking the bottom of the market, at least to my eyes. In addition to, or instead of, owning actual cows, investors can buy what some call an E-COW. COW is the symbol for an ETF that tracks cattle futures. Wow, take a look at that chart.

COW is even lower than it was in March of 2009 when all markets in general took a nose dive. COW just keeps getting lower and lower, the winner of the how-low-can-you-go Limbo game, but COW looks like the only major Limbo player.

If the US economy is rebounding so nicely, why is COW still playing Limbo? Has the American consumer decided that foregoing some beef for dinner wasn't so hard, and now they've lost their taste for hamburger? After all, the consumer is bringing our economy back. Right? Are American consumers becoming more 'green' oriented? Some of them deciding to do their bit to help global warming by not eating beef from a farting beast?

It looks like maybe 9% of them are perhaps doing just that. After all, we're told the economy is on the road back, folks should have been buying more beef in at least June and July when suddenly the economy of the country started looking rosy. Yet consumer demand for beef has dropped 9% in the last 9 months, per Cattle Max.

If you think this is the bottom for beef, maybe it's time to buy some momma cows for your pastures, or jump out there and buy an E-COW, or how about one of those small feedlots that are headed for bankruptcy and closure as discussed in the article below. After all, "the country has the lowest calf crop since 1999 and fewest cattle on feed since 1999".

“As a result of losing money, we have people in dire straits,” said Paul Hicks, a Fort Worth cattleman who works with feeders. “A lot of them are stuck with a lot of empty pens. A lot of feed yards are for sale —there's a world of feed yards available right now.” BARRY SHLACHTER, FORT WORTH STAR-TELEGRAM

Where is the government bail-out for those small feedlots? How about the Obamanomics gurus start issuing cash-back coupons for folks to buy a nice chuck roast? Oh yeah, they probably want to shrink the number of cattle feedlots cause of all that methane gas, have the common folk become vegetarian, and keep those really nice rib-eyes for those elite White House suppers.

Lightbulb! Maybe the White House would like to have a few hundred elite rib eyes from the herds of British White cattle? British White beef producers should work on that, the White House could literally consume all the beautiful grass fed British White beef produced. And it's fitting, the beef of old royalty on the dinner plate of new American royalty. I like that! Maybe that's a niche British White breeders should pursue.


As a side note, I am not fond of the seemingly nasty environment of feedlots. And my awesome cow, Bountiful, just closes her eyes in dismay at the mere thought of one of her babies ever stepping foot into their muddy pens. But, it is impossible to provide beef to the majority of American consumers without feedlots. Perhaps more people are choosing to buy beef direct from the family farm and that is contributing to the decline in demand for the industrial sort of beef.....but I imagine that is as much a pipe dream as believing the current stock market razzle dazzle of a strong economy just around the corner.

Chillingham Cattle - Black ears or Red? - Local 'tame' cows turned out to pasture with the wild Chillingham herd!

These excerpts are from a quite respectable 1792 pubication:

A General History of Quadrapeds,c. 1792, by Thomas Bewick & Ralph Beilby

Can't tell you how many times I've read the Chillingham owners had the black eared ones killed, the wholly black ones, and anything not perfectly white.....how sad...how backward even for those times. A lack of copper in your pasture's soil will cause your otherwise black-eared cattle to have red ears (the muzzle, or nose, will generally remain black in a copper deficiency). Did they slaughter the black-eared ones when by chance the soils were healthy every few years?  Apparently so.........

"The white wild cattle of Chillingham Park have a pile much resembling the Tees Water, but they have uniformly black muzzles, hoofs, and the tips of the horns... the horn denoting the kindred breed above all other circumstances, and on that account the wild cattle must be related to the native cattle of Wales, Scotland and Ireland, the height, colour and direction of the homs being similar. This declaration in Nature, the similarity of horn,..." Source: The Country Gentleman's Magazine,1876 



Above we find reference to the preference for the black-eared ones, as well as a clear indication of the Size of the cattle.  Those not at Chillingham were "much larger" weighing about "50 stone" which equates to about 700 lbs, easily 40% of the average weight of a domestic cow in the USA today. 

As a side note, there are many early references to the Chillingham cattle having black points. Those pocket-book politics I've referred to before came to a resounding head in modern times, as well as in the late 19th and early 20th century, to try to present the Chillingham herd as something distinct, purely preserved, and genetically linked back to the ancient urus/aurochs of Britain -- even in the 19th century many writers found this notion absurd.
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The reality is that the Chillingham herd itself has at least once been down to one female in calf who produced a bull sometime between 1776 and 1836, based on various writers descriptions of the existing stock.

"The stock at Chillingham was once reduced to a cow in calf. The produce fortunately proved a bull." (Jardine, 1836).

It is inconceivable that this bull was not crossed with locally desirable cattle. As well there are ample sources which tell us that English Longhorn, Welsh Black/White, and Highland were used to perpetuate the breed type.  It is truly absurd that in the present day the horned Chillingham cattle are perceived as being more closely kin to the ancient auroch that roamed the British Isles than any other bovine beast -- this notion has been greeted with educated skepticism from it's first pronouncement from the Lord of Chillingham in the early 19th century.

From Bewick in 1792 we also learn:

I'm not sure how these wild Chillingham cattle were penned and the tames ones subsequently sorted off. Based on the following excerpt from Youatt's, The Complete Grazier, 1893, the Chillingham calves apparently couldn't even be weaned from their dams.

1776 Reference to the white cow in Lincolnshire, Surry, and Suffolk

"In some parts of Surry there is a white sort of cows that it is reported produce the richest milk and their fleh more readily receives salt than any of the other."


Quotes from Chapters 1& 2, The Complete Grazier, 1767
"The white breed of kine(cow) were some time ago very frequent in Lincolnshire from whence a gentleman brought them into Surry as a curiosity. They are of different make and much larger than the black cattle, give more milk at a meal, but grow dry the soonest of the three."