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The Commodity Bubble

In the future they might coin this the “Bernanke Effect” or maybe the great commodity bubble of 2011.  The truth is that commodity prices are rising…dramatically.  You might have started to notice this disconnect in your grocery store shopping or in gasoline prices, but if you were to ask our government they would tell you that a basket of goods consumed (CPI) is rising modestly.  How modest do these numbers appear to you?

Sugar and Corn? Those are luxury goods.

If the basic ingredients to food are skyrocketing, then prices of food will eventually have to keep pace which will directly hurt consumers.

Of the 853 ETF’s that I looked at, which unleveraged funds do you think had the greatest return over that same time period?  It is not a trick question:

Are you noticing a theme?

My conclusion is simple:  this time is NOT different.  Commodity prices cannot go up forever and China will not continue to support the market regardless of prices.  What is this “Bernanke Effect” doing to farmland prices?  Well, according to a survey by Farmer’s National Company:

“non-irrigated crop land in central Kansas averaged $3,000 an acre, up 50 percent since June

Crop prices have seen an extraordinary run since early July. A bushel of wheat priced about $4 a bushel on July 4 is now more than $8.50. Other crops have experienced similar increases.

As the land generates more income, it puts more cash in the pockets of the most likely buyers, nearby farmers. It also provides an attractive return for investors who then rent it out to farmers.

The result: Auctions are drawing twice the number of bidders as before, said area agents.”

As with all hot speculation, the commodity run will surely come to an end and will probably have repercussions for all financial markets.  We should have learned by now that large financial dislocations tend to not occur in isolation.

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  1. james herman says

    I copied and pasted the following post at least 200 times in the last 4 weeks. Pay attention to the language on Egypt. Nothing will trigger social upheaval like food price increases in the 3rd world.

    There is no, repeat no, food shortage on the planet today. Sort of… Using the United Nations suggested daily calorie intake there is more than sufficient foodstuffs produced annually, globally. Period. Now then, the question is how you use them….for example, if you wanted to bring the daily calorie level in both China and India up to the U.N. level it would take an additional, not total but additional, 31 million tons of foodstuffs. To put that in perspective the U. S. ethanol fraud consumed 165 million tons of corn during 2010. China has 2.3 trillion dollars in Treasuries but chooses not to expend it on foodstuffs for its own population. India was a net exporter of wheat in 2010…..I had the opportunity to have dinner with the Chairman of one of the largest commodity/food processors in the world over the holidays….there is no food shortage…and the American ethanol scam has absolutely destroyed relationships with food importers from the U.S. , like Egypt for example, that took decades to develop….and now for some Physics: if ethanol were in fact a “sum positive” they would use ethanol as the energy source to produce (boil/distill) more ethanol/corn mash…..and they, the ethanol producers, don’t……because it consumes more energy to make a gallon than you get out of it (referred to as the “thermal load factor”)….It’s nothing like an oil refinery that uses part of the barrel of crude oil to power the refinery. Every ethanol “factory” pipes in natural gas to boil their corn mash. The vast majority of farmers spike in anhydrous ammonia fertizler (to gain the nitrogen nutrient) which of course is made from…..natural gas. The environmentalists who pushed for the ethanol program to begin with have absolutely washed their hands of it. Worse, the additional acreage added for corn production in the last 5 years has come from taking “CRP”-conservation reserve program-out of the program. Basically the federal government spent billions to set this less desirable farm land aside and now watches as their investment literally disappears. Oddly, the little production on this type of poor farmland that is gained is guaranteed by ….federally subsidized crop insurance.
    Just think- 40% of the American corn crop now goes for the 10% gasoline EPA mandated blend rate yet the EPA is pushing to raise the blend rate to 15%–or 60% of Americas corn crop. As an aside 80% of the canola crop, a premium cooking oil, is used for bio-fuels in Germany. Double the price of corn and bull doze another million acres of Amazon jungle to plant; triple the price of tortillas and watch the Mexicans pour north across the border. Noted: Chuck Grasley, the erstwhile Republican Senator, is the mouthpiece for the ethanol scam. He farms 4,120 acres of Iowa corn ground. My source tells me that without the ethanol scam (and it was renewed for only 1 year…) the price of wheat goes to 4$ and corn to $3.35.

    The Deere’s, the Monsanto’s, the Cargill/Mosaic’s, the Potash’s,, had the ethanol fraud pegged from day one. They collectively sent every hooker lobbyist to that whorehouse on the hill, formerly known as the U.S. Capitol, to fellate every senator they could rent a room for, with Grassely being the punk of punks. Corn and wheat prices are legislated prices via a per bushel subsidy. Never in 50 years of farm belt handouts has a

  2. SurlyTrader says

    Great comment. It shocks me that the CRP “conservation” program can pay farmers/landowners an 8-10% after taxes and costs dividend just to sit on their land and do nothing with it. It also shocks me that the ethanol program was sold as a green initiative when it is a net negative to the environment, food prices, and taxes. The only thing we have learned is that the guys with their open hands closest to our congressmen are the winners and the rest of us are suckers.

  3. John says

    The price of butter at Costco is up over 50% from Sept 2009.

  4. Mat says

    Surly Trader-
    Then you better get your hand close to the Congressmen.

Continuing the Discussion

  1. Tabla du Jour: ¿Burbuja 2011? Debatan… « Quantitative Finance Club linked to this post on February 10, 2011

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