U.S. Economic/Financial News
Congressional Legislation and Hearings on Hedge Funds
Sen. Charles Grassley (R-Iowa) is introducing legislation to subject hedge funds to increased oversight and routine inspections. The Washington Post March 8 reported that the proposed law, "which reinstates rules struck down by a federal court last year, would require funds that manage more than $50 million and have more than 15 investors to register with the Securities and Exchange Commission as investment advisers."
Meanwhile, the House Financial Services Committee, chaired by Rep. Barney Frank (D-Mass.), announced that starting March 13, it will hold a series of hearings on hedge funds and private equity pools. The Committee's press release lists nine issues it will address:
1. the emerging scope of use of these funds in the U.S. and global financial markets;
2. whether investors in hedge funds (particularly pension funds) were sufficiently informed about them to protect the interests of their members;
3. whether the investment strategies of the funds were sufficiently transparent to their investors;
4. whether the increase in number and size of funds has had an effect on credit and underwriting standards of investors or lenders in some markets, e.g., the mortgage markets;
5. whether the President's Working Group's recommendations about hedge fund risk management and regulatory oversight are sufficient;
6. varying international regulatory perspectives on hedge fund regulation;
7. the potential systemic risks posed by the increasing use of leverage and credit;
8. the extent to which the increased liquidity has improved the efficacy of domestic capital markets; and
9. the impacts on the economy in areas where hedge funds have made major investments.
Ag Committee Hearings Probe Diversion of Corn to Ethanol
"Right now there is not one bushel of corn available in Bruning, Nebraska," at any price. This was the comment by the representative of the National Pork Producers, Joy Philippi, a pig producer in Nebraska (third leading corn, hog, and ethanol state in the nation), who testified at a hearing titled, "Review of the Impact of Feed Costs on the Livestock Industry," held by the House Agriculture Subcommittee on Livestock, Dairy and Poultry, on March 8. The price of livestock feed in the last year has soared by 50%, on top of energy prices rising by 50% since 2004. About one-half of U.S. corn output goes into livestock feed, and now corn-for-ethanol has soared from 6% of the 2000 crop, to 20% of the 2006 crop. Corn prices have doubled in a year. Philippi stressed that no matter how high the price, "If we can't find corn, we can't raise pigs. If we can't raise pigs, it's not good for ethanol either." At present, corn "carryover" (reserve) stocks in the U.S. are at the level 5% of use of the annual corn crop, which means that at any timee.g., in the case of bad weather during the 2007 crop year, there could be a "negative carryover" (in USDA jargon)!
With different particulars, the same point was made by four other livestock spokesmen, for beef cattle, dairy, turkeys, and eggs. In brief:
Cattle: 80 of every 100 pounds of beef cattle feed is corn. True, you can substitute distillers grain (DG) for 30% of cattle feed, but the results are variablewhat the nutrients are, whether the cattle will thrive on it, etc. DDG (dry distillers grain) is hard to handle. Wet distillers grain is preferred, but for that, you need to be within 150 miles of the source. How are you going to relocate all fed cattle to such sites?
Dairy: "The biofuel revolution ... has sent a shockwave across the industry in the form of operating costs," said Rob Wonderlich, an Iowa dairyman. There are 62,000 dairy farmers cross country, and feed costs have risen 45-60% in one year. Plus energy costs have doubled since 2004. Bull calves' value is dropping, because they need more corn to meet slaughter weight, and the "market" doesn't want them. You can switch to distillers grain only up to 6-8% for lactating dairy cows, and after that the milk fat content goes down. Besides, DDG prices are rising almost as fast as corn. "I purchased last year FOB from the ethanol plant, DDF for $75 per ton. That price has since risen into the $140-150 range."
* Poultry/Eggs: 50% of the cost of producing a dozen eggs is feed. For the best ration for laying hens, 60% is corn. A ton of chicken feed that cost $106 a year ago, is now $168.
* Turkeys: Half the cost of tom turkey is feed. There is no substitute for corn. You might get away with 10% DDG, but that's maximum. Mexico is the foremost importer of U.S. turkey dark meat, but if the price goes up any more, Mexico won't buy it. "They will switch to an alternative ... if they have an alternative...."
Pork: In 2005, there were 103 million hogs in the USA. This single-stomach animal does the least well of all on distillers by-product. The high corn costs will mean a smaller livestock herd, in turn, causing ripple effects throughout the farmbelt. It's said that each new ethanol plant creates 80 jobs; but if the equivalent volume in corn went through pork production, 800 jobs are retained.
What to do? The livestock spokesmen all stuck with the we-want-to-reduce-foreign-oil-dependence line, and called for ending the 51-cent excise tax advantage for blenders of ethanol into gasoline, to damp down the corn-ethanol stampede. Further, the chairman of the United Egg Producers, Ron Truex, representing 90% of all U.S. producers, called for the Federal Government to alter the Renewable Fuel Standards to delay the turn to ethanol, until cellulosic ethanol is developed. He said that no food-use product should go into ethanol; only non-food-use biomass. He also stressed that if high feed prices aren't stopped, "[food] production will pass into stronger hands," meaning "more consolidation" of ownership of the food chain.
Bye-Bye, Chrysler; Hello Cars Built in China?
DaimlerChrysler CEO Dieter Zetsche says Chrysler is likely to outsource production of several lines of small cars to a Chinese partner, because he claims it is impossible to build them in the U.S. competitively due to low profit margins. Zetsche remarks, at the Geneva auto show, were reported in the Detroit Free Press March 7. Chrysler already has a preliminary deal with Chinese automaker Chery to assemble a subcompact to be sold in China, the U.S., and Europe.
Meanwhile, Blackstone Group and Cerberus Partners are having separate meetings with Chrysler executives over a potential buyout.