Submitted by TFMetalsreport
Ag Commodities And The Coming Inflation
Longtime readers will recall that we've had several conversations here
regarding the impact that the Fed's quantitative easing policy is having
on the costs of everyday food items. Soaring prices of agricultural
commodities are going to continue to have a devastating effect on the
purchasing power of average Americans and consumers around the globe.
Since prices have now recovered some from the selloffs after the
Japanese earthquake and tsunami and since there is no end in sight to
QE, I thought it was time to once again take a look at out favorite
commodities and assess where their prices may be headed over the spring
Let's start with the grains because rising grain prices cause all sorts
of inflation. Not only are grains the raw input to countless consumer
goods, grains are also the primary foodstuff for cattle ranchers and hog
finishers as they prepare their herds for slaughter. Let's start with
wheat, which is being influenced not just by the falling dollar. Price
is also feeling the impact of the ongoing drought in the "winter wheat
zone" of the high plains of Kansas, Oklahoma and Texas.
Now take a look at the chart. Long-term support held at $7.50 and wheat looks almost certain to catapult higher very soon.
so how about corn? Corn is extremely important in food production as it
is used not only as a primary ingredient but as a sweetener, as well.
First, let's look at the chart. Support was found, as expected in the
area around $6.50. I have no doubt that corn will soon resume its upward
move along its primary trendline from last summer.
here's the deal with corn...it's expensive to grow! The primary
fertilizer that Midwestern corn farmers utilize is anhydrous ammonia.
Last year, anhydrous ammonia cost your average farmer about $425/ton.
This year, the cost has almost doubled to $750-800/ton. So, while it
might be tempting to seed a lot of acres with corn to capitalize on the
high price, the input and production costs are so high that many farmers
will choose to plant soybeans, instead. Less acres of corn planted lead
directly to less production. Less production leads directly to even
higher prices. (Remember that below when we get to cattle.)
So what about soybeans? Soybeans are the one grain that I don't expect
to rise in price. They will, most likely, stay rangebound through the
summer. Why? Besides the fertilizer costs affecting plantings, soybeans
get extra acreage for another reason: Weather. Because soybeans have a
shorter growing season, they are a "fall back plan" for many farmers who
struggled to get corn planted due to overly wet spring conditions.
If the upper Midwest spring turns out cool and wet, many farmers will
forego corn planting and turn, instead, to soybeans. Extra supply =
Now, let's get back to corn. Have you ever heard the term "corn-fed
beef"? Most of the best steakhouses proudly champion corn-fed beef
because, frankly, its tastes a helluva lot better than grass-fed. The
high sugar content of the corn gets converted into fat. The fat makes
its way into the muscle and you, Mr. Steakeater, get yourself a
beautiful, marbled "prime" steak. Fat cows are also desirable at
slaughter because, well, they weigh more and cattle are sold by the
pound. OK, so now, pretend for a moment that you're a cattle rancher. As
your cattle are growing and being prepared for market (the term is
"finished"), you want to feed them as much corn as they'll eat and you
can afford. Corn at $7.00/bushel really cramps your business plan. Your
first reaction is to control costs by thinning your herd, i.e. you sell
some prematurely, before they are "finished". You might also simply want
to sell some of your herd to take advantage of today's high prices.
Either way, this extra supply in the short term has actually worked to
keep cattle prices from soaring at the same rate as the grains. But this
is temporary. By this summer, supply will decrease as cattle that would
have been coming to market just then have already been slaughtered. Are
we already beginning to see this play out on the chart? Well, take a
Maybe you're comfortable and you have all the disposable income you
need. Great, but what about your sister, trying to raise her three kids
on 50 grand a year? What about your neighbor or your best friend who is
trying simply to make ends meet after losing a job? What can you do to
start by warning them about the coming surge in food costs brought about
by quantitative easing. All of the factors discussed above, combined
with soaring fuel costs, will most certainly lead to a much higher "cost
of living" in the near future. The time to act is now.