Wheat Buying Opportunity??

Spot wheat prices have fallen by almost 70% in the last three months from $9.36 per bushel in February to $5.54 per bushel in February, and prices are now at their lowest level in almost a year (since June 2007 when wheat was $5.34).

The U.S. Department of Agriculture's latest estimate predicts that 2008 world wheat production will increase considerably, including an 8% increase in U.S. production to 656 million tons.

Many thought that the Ethanol craze would have have farmers substituting wheat for corn, but to the surprise of many economist, that just wasn't the case.

A Breather For Gas Prices?

So when do the energy markets take a breather from the amazing run they are on?

• Crude oil hit a record above $126 a barrel last week
• June unleaded gasoline futures (RBOB) are also in uncharted territory, closing higher for the sixth day in a row Friday, May 9. This puts Unleaded gasoline in overbought territory.

I believe RBOB (Reformulated Gasoline Blendstock for Oxygen Blending) will be a buy in the $2.60 gallon range (currently $3.16 gal). This is were we see VERY strong historic support (see chart). If we can buy a Dec2009 Option in the $2.60 gallon range, that would mean that we're saying gas would be higher than $3.20 a gallon at the pump in Dec 2009 (add $0.60-$0.65 for tax to the futures price). I believe this would be a smart play.

Unleaded Gas Historic Price (yearly chart, click to enlarge)

I just found this gas price map really interesting (click to enlarge)

Oil As A Hedge

The June2008 Crude Oil contract is trading at $125.18 per barrel this morning.

Crude oil had a slight correction in trading in the end of April. Since then, the market has rallied more than $13 per barrel. Some analysts believe this market cannot be sustained at these levels, but that has also been the thinking since the market traded above $115. Remember, 'the trend is your friend".

Looking at the chart below, we could see a rally through $130 per barrel near term-and potentially above $140 in the next couple of months of trading. Analysts believe traders are using the oil market as a hedge against inflation, lending support to the inverse relationship between this market and the U.S. Dollar index (same thing is happening with Gold and Silver). The Dollar saw a rally of its own in the end of April, but so far has traded lower in the second week of May. A continued weak dollar will support any up move for Crude.

Is The Ethonal Bubble Finally Ready To Burst???

From Slate.com's Daniel Gross' article "Corn Dogs"

"Judging by recent financial results, the big villains in this story—the American companies that are responding to government mandates by buying about 20 percent of the U.S. corn harvest and processing it into fuel—aren't exactly thriving. In fact, their bottom lines and stock prices are suffering pretty badly."

So whats wrong with this picture? In theory, business should be great in the ethanol market. Bush's policies have mandated consumption of the fuel, thus stimulating investment (and record high levels of production, see chart above). But just because the government forces people to buy your product doesn't mean it's a surefire win.

There is a wicked mix here combining for the perfect bubble:

• High oil prices
• Tariffs that protect domestically produced ethanol from imports
• Tax credits for companies that blend ethanol into gasoline

The end result being excess capacity and heavy competition

Food For Fuel = Big Time Problems

A Dollar Rebound??? Not Likely

Yes its true that Silver and Gold have taken it on the chin of late as rumors of a dollar rebound are in the air. But, a good earnings report here or there or a promising jobs report will not save the dollar. A couple things to keep in mind:

• We have not hit a bottom in sub-prime (ie. The recent U.S. pending sales of existing homes fell to its lowest level since the index began)
• The US debt is $9.3 Trillion (that's 1.45 billion per day or $30K per family)
• China has around $514 billion in Dollar reserves! If they ever decide to sell the dollar that will be a financial nuclear bomb.
• The Euro will eventually become the worlds currency of choice especially for commodities such as Oil.
• Oil looks to be staying above $100 for a while (or years!)
• Fed keeps cutting interest rates
• Inflation...Inflation...Inflation

I am long silver looking for a move back of to the $18oz to $20oz level in the coming months. I know many people right now who are buying physical silver as a hedge against inflation.

VACATION DESTINATION WHERE THE DOLLAR RULES
I'm thinking of going to Colombia in a few months, but after reading this weekends Wall Street Journal I think I'm going to Argentina. Here's a quote from the article:

“Today, a dollar buys more than three pesos. In a land known for superb beef, a steak at a nice restaurant costs about $12, and it is less than $10 at more-modest places. A subway ride is 25 cents and a 20-minute taxi ride is about $5. Like South Africa, many small, stylish hotels are available in the $100-to-$150 range.”

$1.00 = 1,762.5 Colombian Peso
$1.00 = 3.1650 Argentine Peso

Recession Odds Plunge From 60% to 30%!!

In just the last 10 days, the odds of a recession have fallen from 60% to 30%, based on futures trading on Intrade.com (see chart below, click to enlarge).