Tuesday, October 12, 2010

The Irrational Volatile Grain Commodity Markets

photo source

The state of journalism in this country is unfortunate and another nail in the quality coffin occurred when Rupert Murdoch bought the WSJ (Dow Jones) in August 2007. His "News Corporation" had a reputation for cutting employees and gutting existing systems. We already knew where to find our sports news and recipes, thank you.

So, when I read the WSJ's front page story titled "Farm Belt Bounces Back; Corn, Soybean, Cotton Prices Advance as Asian Demand Lifts U.S. Heartland", and the first sentence was "Major agricultural commodities continued their extended run-up in price, underscoring how much of America's farm belt is booming even as the overall economy continues to struggle," I knew I was going to be disappointed.

Luckily, the middle of the article contained a tad bit of substance, but so much of the story went missing and was extremely shallow, something one would not have expected from a front page, in depth article from the WSJ a few years, or more, ago. There is no mention of Ernie Goss's monthly report which continued to show the Heartland in negative economic territory in September. There is barely a mention of the dollar's value, a pretty key element when it comes to U.S. commodity exports. Then, unexpectedly, the article veers off to become a cotton story.

One part of what was missing in the article was spelled out by Marshall Auerback over at Naked Capitalism, in his post "You Can Thank Ben Bernanke for Higher Food Prices." He explains why grain commodities no longer follow logical stock-to-consumption numbers due to speculation and bubble blowing. Towards the end of the article, he concludes:

"If quantitative easing by the Fed and other global central banks turns out to be dramatic, the desire to hold physical assets may increase – no matter how high their cost of carry and how weak the global economy may become. Commodity prices will then remain high relative to stock availability, and might go much higher."

As for the above quote, I wish I knew whether that idea will prove true or not. My take on the subject is to expect volatility and quite possibly regulation controlling food commodity speculation. A few days ago on this blog, I covered the Agrimoney article warning that Societe Generale is reducing their commodity holdings in preparation for commodity trading clampdowns expected from the G20. But, until that happens the traders must be having a hey-day racing their computers in quick run-ups and downs based upon USDA and other crop and weather reports. So, continue to expect irrational volatility until regulation happens, if and when it does.

On a positive note for the WSJ, however, "Heard on the Street" did a brief article which came to a similar conclusion as Auerback: Fed's Reflation Bet Could Hit Consumers Before It Helps. It concluded, "Fed policy makers may be striving to kick-start growth and reduce chronic unemployment levels. But because assets like commodities are responding to cheap money much faster than, say, houses, the Fed risks drowning struggling U.S. consumers instead."

And keep expecting to hear those pea-brained Ag bulls out there explain how logical everything is playing out because the world's population is growing rapidly so it is obvious that food will become more expensive.