Let Them Eat Quantitative Easing

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Grain prices soared on the Chicago futures exchanges on Friday. A report from the USDA stating that there would be lower inventories was cited as the cause. Quantitative easing from the Fed was behind the extent of the move however. Commodities are priced in dollars and with more of them floating around; any piece of negative news can cause food prices to go through the roof.

Food prices were already rising during the summer because Russia had halted wheat exports due to a severe drought. On Friday, the USDA (United States Department of Agriculture) cuts its crop estimates for the U.S. for second month in a row. The corn crop is now expected to be 3.4% lower than last year. The soybean crop is still expected to be good, but will come in 2.2% less than last month's prediction. The USDA now says global wheat inventories will be 1.8% lower than they thought in September.

While these changes seem minor, as would be expected in a market with too much money floating around because of the Fed, the impact on prices was explosive. December corn futures rose 8.5%. Soybeans were up 3.9% on the day. Both are used as animal feeds and this raises prices for producers. Shares of some of the big meat companies fell sharply in response. Consumers should expect higher prices at the store.

Analysts are now concerned about another food crisis, like the one in 2007 and 2008. Food prices got out of control back then and a number of countries stopped grain exports to insure adequate supplies for their domestic markets. This is only one of the many potential downside risks of Ben Bernanke's new quantitative easing program. Bernanke continually insists there is no inflation however, just as he continually insisted that subprime loans wouldn't cause any problem with the economy. Like a modern day Marie Antoinette, if bread prices become too high he is likely to suggest the peasants eat cake. They are already eating his quantitative easing, whether they know it or not.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Agricultural Commodity Prices Weaken on Ample Supplies

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The USDA report on March 31st was bearish for grains. Wheat, soybeans, corn and rice all had significant drops in their last day of the quarter trading. Agriculture commodities have been weak since they peaked in 2008 and a sustainable rally in the immediate future is extremely unlikely.

Food commodities had big rallies starting in 2007 and these lasted into the spring of 2008, when most prices hit their highs. At the top, wheat was over $13 a bushel, soybeans over $16, corn around $7.50, and rough rice around $25.00.  Significant selling followed in later 2008 and into the summer of 2009. A late year rally from last year has now faded. Wheat closed out the first quarter at $4.505, down 21.5 cents or 4.6% on the day. Soybeans were at $9.41, down 33 cents or 3.4% and corn for May delivery closed at $3.45 down 9.5 cents or 2.7%. Rough rice was the least damaged dropping 24.5 cents or 2.0% to $12.215.

The USDA report didn't actually appear to be that negative. U.S. farmers will be planting 9% less wheat in 2010, although winter wheat plantings from last fall were 2% greater than they were initially thought to have been. The soybean crop should only be 1% larger than last year and corn 3%. In a bear market, news tends to be looked at with a negative bias though and there is overreaction to the downside. Agricultural ETFs with significant grain exposure, such as DBA, RJA, and GRU are all trading in bear market patterns with the 50-day moving average trading below the 200-day moving average. The cross just took place for RJA.

While the short-term picture for the grains appears negative, in the long-term prices will go up again. The ability to increase global food production is limited. There is little additional land that can be opened for cultivation and the big yield increases from the Green revolution - use of cross breeding to produce sturdier and more productive plants, the introducion of nitrogen based fertilizers, and extensive applications of pesticides, fungicides, and herbicides - are in the past. Population continues to grow though and the ability to produce more food isn't keeping up. At the same time, improved economies in emerging markets means a greater demand for food from large numbers of the underfed. The basic realities of supply and demand will eventually cause food prices to go back to their 2008 highs and probably much higher. The charts will tell us when this is likely to happen.

Disclosure: None

NEXT:  March Employment Numbers Better Thanks to Government Hiring

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

All The Glitters Isn't Gold, It's Also Silver

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Commodities are priced in U.S. dollars. When the Fed began its rate cutting campaign in earnest on September 18, 2007, it became inevitable that the U.S. dollar would fall. While the value of the dollar goes up and down all the time, this time the drop would have serious consequences. The trade-weighted dollar was hoovering just above all time lows in August and would fall through multi-decade support by the end of September to reach levels never before seen. Since the dollar was hitting all time lows and commodities were priced in dollars, everything else being equal, it was reasonable to assume many commodities would subsequently be hitting all time highs. This is exactly what happened to commodities that were consumer necessities or that were currency substitutes.

The biggest price rises took place in food commodities. Wheat had already started rallying in mid-2007. Once it became clear that the Fed was beginning a new easing policy in mid August, the price of wheat on the charts started to move straight up. By the end of September its price would almost be double what it had been only three months before. Major rallies in soybeans, corn, and rice also occurred taking them to multi-decade or all time highs as well. These rallies in turn showed up in rising global food prices, up 20% for 2007 and 75% since the lows of 2000. While U.S. consumers were paying more at the supermarket just like consumers elsewhere, the Federal Reserve continued it long term policy of generally ignoring rising food (and energy) prices because they were 'volatile'. While food prices can indeed be volatile, a report by Bloomberg News found there had not been a year over year drop in food prices in the United States for at least 40 years.

Like food, energy prices were also not a part of core inflation, so the Fed tried its best to ignore them as well. U.S. consumers unfortunately did not have this option. By the end of September, oil had broken through it's all time high set in mid-2006 and headed toward a $100 a barrel, which it reached around the turn of the year. While this was a new nominal high, it was approximately only the 1980 high adjusted for (official) inflation. Interestingly, the price of gasoline at the pump did not break its 2005 post-Katrina high, when oil was only $70 a barrel, until March of 2008.

Finally, the money-substitute commodities, gold and silver, also had significant rallies. Gold broke its April 2006 high before the end of September, while silver lagged by several weeks. Gold would break its January 1980 nominal closing spot-price high in November and the all-time intraday high of $875 an ounce somewhat thereafter. Gold would reach 1000 in March 2008. Unlike oil, gold was not even near its (official) inflation-adjusted high of approximately $2200 an ounce. While percentage wise, Silver had an even bigger rally than gold, reaching $21 an ounce in March of 2008. This was not even near its approximately $50 nominal price high in January 1980, not to mention its over $130 inflation adjusted high.

For more on this topic, please see notes for the talks, "Thinking Outside the Bucks - Inflationary Investing" and "How to Profit from the Falling Dollar" at: http://invesing.meetup.com/21/files
and our video, "Commodity Investing - How to Profit From the Falling Dollar" at:
http://www.youtube.com/watch?v=IG5zApWcOk0.

Next: Australian and Canadian - the Only Dollars Worth Holding

Daryl Montgomery
Organizer, New York Investing meetup

Please see our web site for more about our group: http://investing.meetup.com/21.