Your Reading List

Good Times continued

continued from previous story

Beef producers will need to cut costs, raise beef the market wants, and likely either work with smaller herds and have another income or increase the size of their herd to 400 cows or so.

ple had become old enough since 1999 to have a job. So I don’t know how the U. S. can have only 9.7 per cent unemployment, but I can see how it’s going to take a long time to get those employable people into the labour market and to the point where they have debt servicing ability.

So I wouldn’t expect the U. S. economy to recover rapidly. It might stop falling, but getting back to the good old days is going to take a lot longer than it used to. Plus we have Portugal, Ireland, Italy, Greece and Spain (PIIGS) in financial trouble. These are part of the European Union so odds are none of those countries will be allowed to go broke, but they are in tough financial spot.

The United Kingdom isn’t part of the EU, but its economy is in rough shape, too, and there will be no white knight to save it. That country is on its own. I don’t expect the economy in most developed countries to get back to the good old days any time soon.

China of course is trying to SLOW its growth down to eight per cent per year. This is an offsetting factor, but its economy is quite small compared to the U. S. economy. So going forward we have a small economy surging and a big one flat to growing slowly at best.

GRAIN AND LIVESTOCK

When I talk with farmers, we usually get back to grain and livestock. Some ask what I think is ahead. Part of the China Effect means that China will be buying fertilizer and maybe eventually grain. So we should expect both to cost more than in the past. I think the ceiling for grain prices will be a floor and that will be hard on the livestock business.

In his book “Grass and Grain,” Boyd Anderson, Grainews contributor, wrote that cattle prices were very high in 1951 and again in 1969, 18 years later. When grain prices dropped in 1983-84, the cattle business had 19 years of good times except for maybe a year or two along the way. That ended in 2003 with BSE and good times have not recovered. (By the way, to order Boyd’s book, write him at Box 7, Glentworth, Sask S0H 1V0. Cost is $15.)

From what I see, seven events led the good times for beef from 1984. Briefly they were: 1, low Canadian dollar (Canada was a financial basket case); 2, low grain prices; 3, low cost of living; 4, low fuel and repair costs; 5, eating red meat was fine; 6, U. S. wanted our beef; and 7, U. S. farm policies helped to keep grain prices low.

When I spoke in Teulon I asked, will these seven events ever pile

up again to make good times for beef? I doubt it. That doesn’t mean beef won’t survive. But producers will need to cut costs, raise beef the market wants, and likely either work with smaller herds and have another income or increase the size of their herd to 400 cows or so. About the only positive event I see is that ranchers in Argentina sold off their cows a couple years back and now are holding back heifers.

I did talk to one farmer who had 25 cows and his gross income was $10,000 and costs were $2,000, plus land that had no other use. What are your costs? He had almost no equipment. I doubt most producers can operate on

that sort of ratio of costs to gross income.

In our tax business, I see the inventory provision went down some when CAIS and other programs paid out money, but that might not return. Now I suspect the inventory provision will be rising and that is not good news.

A FEW BRIEF STOCK THOUGHTS

I don’t know what the future will bring, but it looks like China wants to cool growth so the price of copper, iron ore and coal could level off. It also looks like China steps in to buy gold when prices drop so there could be a floor there.

The price of gold went up to around $1,220 per ounce in 2009, about 130 per cent of its 200-day moving average (dma.) That was too high too fast. As I write on February 11, 2010, the price had come down to $1,060 or so, which is around 104 per cent of its 200 dma. It could move sideways for a while and then go up. We own ABX and OSK for gold stocks, but there are others.

Here’s another way some farmers used covered calls to goose the returns from their canola. In November 2009, my idea was to sell around 4,000 bushels or $35,000 worth of canola, buy 1,000 shares of Tech Resources (TCK. B) and sell a call for May at the price of the day and collect $4 per share or $4,000. That added $1 a bushel to their gross income, eliminated the threat of spoilage in the bin and theft, and they learned a new strategy. And that $1 is taxed as capital gain. As I write February 11, if you did this, the shares would cost you $37 and selling the call for August would bring in around $4.50 so 1,000 shares would cost $37,000, bring in $4,500 or close to $1 a bushel.

Here’s a move where selling calls cut our risk: I paid $18.60 for 2,000 shares of a silver mine symbol CDE. Then I sold a call for one year out and collected $4.60 or 24 per cent. That brought my cost down to $14. The stock trades at $14 and change as I write, so selling a call reduced my risk as a stock dropped. Odds are this will work out fine. If we sell a call and the stock goes up a lot, we simply buy the call back and sell at a higher strike price. We may limit gains once in a while so for a fast rising stock like TCK. B, I didn’t sell calls on most of our shares as they went from $9.50 to $37 for us.

I’M IN CANORA MARCH 9

It’s short notice, but Mike Jubinville and I will be in Canora, Sask., on March 9, all day. Call 1-306-563-6337 to register.

Andy lives in Winnipeg and manages his own investments. In his newsletter StocksTalk he explains his strategy step by step as he buys and sells stocks and covered calls. If you want to read the newsletter free for a month, go to www.StocksTalk.net,click on “go to form,” fill out five lines and submit.

Comments

explore

Stories from our other publications