Federal Reserve Inflating Bubbles Pushing Agri-Foods to New Highs

Commodities / Agricultural Commodities
Nov 06, 2010 - 06:09 AM
By: Ned W Schmidt

Readily acknowledged is that first action of new U.S. Congress should be to call for resignations of all members of the Board of Governors of the Federal Reserve System.. Their irresponsible acts to date have clearly violated their mandate to provide a healthy economic environment. With Federal Reserve Bubble III, manifesting itself in the inflated and unnatural values for non dollar currencies, distorting the global economic system, they must be removed immediately and most recent policy action nullified.

With the Federal Reserve Currency Bubble comes, as always, those that benefit. As above chart portrays, one of those beneficiaries has been Agri-Food commodity prices. Our Agri-Food Price Index continues to set new highs. On the other hand, we continue to show the miserable performance of U.S. equities, a consequence of Federal Reserve and Obama Regime mismanaging the U.S. economy.

As evident in chart to the right, Agri-Food commodity prices have matched the highly touted returns in $Gold. Over time the return on Agri-Food commodities should be higher than that for $Gold. When $Gold is harvested, a goodly part of it goes into storage to last forever. When Agri-Food commodities are harvested, they are eaten and disappear.

Double digit real growth is hard to achieve in the world today. However, as this next chart portrays, U.S. grain exports are this year's growth industry. This chart, from USDA data, is for the Big Four, corn, soybeans, wheat, and rice. Measurement is in tons, not dollar values.

Bar on left is the year-to-year change in Big Four grains already exported by U.S. Agri-Producers this crop year. Middle bar is for export sales that have not yet been completed. Final bar on right is for total of first two charts. How many industries are reporting double digit real growth? And remember, these are staple grains, not iPads.

Why have Agri-Grain demand and the prices of those Agri-Grains risen so dramatically?

First, Agri-Food demand from the world, driven in large part by China, is straining the capability of the global Agri-Food supply system. China is now a net importer of soybeans, corn, and beef. That list will continue to expand.

Second, the global Agri-Food system is now operating in the price inelastic portion of the long-run supply curve. That means that prices rise more than the percentage change in demand. See The Joy of Agri-Food Price Inelasticity.

Thirdly, the ongoing effort of the Federal Reserve to unilaterally devalue the U.S. dollar is lowering the real price to the world of U.S. grains. A falling dollar makes U.S. Agri-Food production a bargain for foreign consumers. That policy is raising dollar value of Agri-Grains because the value of the dollar is less. Part of the inflation that the Federal Reserve hopes to achieve with devaluation of dollar will arrive in the form of dramatically higher food prices. Question: Will U.S. consumers be able to afford to eat if the Federal Reserve continues its policy of dollar devaluation?

In the chart below, highlighted by arrow, is the ongoing devaluation of U.S. dollar engineered by Federal Reserve. If that group of intellectually inbred academics is allowed to fully implement their dollar devaluation, world will continue to reinvest their dollars in Agri-Food commodities and other real assets like $Gold rather than hold dollars. Eating will become more expensive, but that is part of the stated goal of Federal Reserve policy. More inflation is its goal.

On the other hand, the inverted parabolic curve portrayed in that curve is a coiled spring. Probability of a move counter to that over zealous selling of the U.S. dollar is increasing. Parabolic curves, normal or inverted, due ultimately correct. Were that not true the NASDAQ Composite Index would be at "10,000" and oil would be at "$250."

A large "dollar premium" has been built into all commodity prices. When the dollar reverses path, that "dollar premium" will be removed. And quite simply, world is not likely to tolerate a group of intellectually inbred Keynesian ideologues to unilaterally devalue the dollar. Such a development could create a major opportunity for investors as those assets, $Gold, Agri-Equities, etc., remove the "dollar premium" from prices.

Economic growth in China and India will create the largest middle class in history over the next decade, more than a billion people. As their incomes rise, they will eat better. Global demand for Agri-Foods will continue to rise, and bump against a price inelastic long-run supply curve. As a consequence, Agri-Investments are likely to be one of the most lucrative investment themes for the decade ahead. Investors should be researching this sector now, awaiting those always inevitable corrections and consolidations that can be used to make timely investments.

Rampant Inflation In 2011? The Monetary Base Is Exploding, Commodity Prices Are Skyrocketing And The Fed Wants To Print Lots More Money

[snip]

But what is even more troubling is the dramatic spike in commodity prices that we have seen in 2010.

Wheat futures have surged 63 percent since the month of June. Wheat has recently been selling well above 7 dollars a bushel on the Chicago Board of Trade.

But wheat is far from alone. In his recent column entitled "An Inflationary Cocktail In The Making", Richard Benson listed many of the other commodities that have seen extraordinary price increases over the past year....

*Agricultural Raw Materials: 24%

*Industrial Inputs Index: 25%

*Metals Price Index: 26%

*Coffee: 45%

*Barley: 32%

*Oranges: 35%

*Beef: 23%

*Pork: 68%

*Salmon: 30%

*Sugar: 24%

*Wool: 20%

*Cotton: 40%

*Palm Oil: 26%

*Hides: 25%

*Rubber: 62%

*Iron Ore: 103%

Now, as those price increases enter the chain of production do you think that there is any chance that they will not cause inflation?

Do you think there is any chance at all that producers and retailers will not pass those costs on to consumers?

It is time to face facts.

[snip]

Also the bio-fuels scam.

The Bio-Fuels Scam by James M. Andrews

Since 2007 the price of food around the world has just about doubled. Bad harvests, inflation, or George Bush didn’t cause this price increase. According to a secret report from the World Bank, reported in the UK’s Guardian, 75% of the increase in price has one source: “Biofuels.” This contrasts with US claims of only a 3% biofuels-caused increase. The World Bank also says that rising food prices have pushed 100 million people worldwide below the poverty line. Riots have been sparked from Bangladesh to Egypt.

Where is the outrage? Where are the MSNBC stories on food riots? Where is Sean Penn?

The Holy Grail of the Left in recent years is Climate Disruption (formerly known as Global Warming and Climate Change). Much ink has been spilled and much airtime has been devoted to pushing the Green Agenda. Legislation has been passed in the US, Europe and other places to address this so-called crisis. Incandescent bulbs have been banned, and mercury laden CFLs required. Coal-fired power plants are shuttered, raising the price of energy. Vast oil fields are placed off limits. “Cap and Trade” rules threaten our already reeling economy. Among other measures, Congress mandates that gasoline contain 10% by volume of ethanol. As a result, the US is currently burning about 25% of its corn crop as fuel. Government subsidies and mandates work quite well at converting food into fuel, thus reducing the amount of food. As anyone with more than a room temperature IQ knows, less of something results in higher prices. Hungry people? Pssh! Saving the planet takes precedence.

Brazil is clearing (by burning) tens of thousands of acres of rainforest to plant sugarcane — not for human consumption, but for conversion to ethanol. Much more acreage has been cleared for sugarcane production than for lumber. As a CO2 “sink,” sugarcane is non-existent compared to the trees it replaced. If CO2 were such a threat to the survival of the human race, wouldn’t keeping the rainforest be a good idea? Don’t burning millions of trees produce many thousands of tons of CO2? Clearly, common sense is missing from the “settled science” agenda of Climate Disruption.

There are other problems with biofuels than “merely” world hunger, deforestation and air pollution. Corn is a thirsty plant. Much water is used to make it grow, and copious quantities of nitrogen-based fertilizer. In addition to depleting the aquifer, fertilizer runoff ends up in the ocean. The Gulf of Mexico has a dead zone the size of New Jersey. Fish and nitrogen aren’t compatible. The blue crab population in the Chesapeake is at a record low, and the sizes caught are smaller than in the past. Of course, “there are those who say” that Climate Disruption is to blame.

Ethanol is highly corrosive. It absorbs water from the air like a sponge. It cannot be transported in pipelines, necessitating delivery by (diesel) tanker trucks. If used in aircraft, water in the fuel can cause engine failure at the colder high altitudes. If left in your lawn mower or chainsaw over the winter, it causes serious rust problems. It lowers your car’s mileage, negating any benefits from “reducing our dependence on foreign oil.” It causes rust in your fuel lines and engine. It burns too hot in catalytic converters, causing premature failure. However, your car and lawnmower are not the only things at risk. According to a study conducted by National Institute of Health, there is a nearly three-fold increase in thyroid cancer risk for women who had used a public water supply that had nitrate levels of 5 milligrams per liter (mg/L) or higher for five years.

Given all these easily verifiable facts, why would we continue to mandate the use of ethanol in our gasoline? Why would we spend billions of taxpayer dollars subsidizing it? Why would Big Ag be pressuring our corrupt and greedy political class to increase the mandate from 10% to 15%, despite alarm from automotive manufacturers concerning engine damage? You be the judge. Think about this the next time you shop for groceries, fill up your car, or pay your utility bill.

Triple-A has issued a warning about big spikes coming in gasoline prices at the pump too...

The liberal media around here is pawning it off on “greedy big oil”...

Hello - how hard is it to understand - as the value of the $ drops, it BUYS LESS... Thus - it takes MORE $ to buy the same goods...

Quantitative Easing - ie - firing up the printing presses, does nothing more than penalize those who have the least. If the poor unemployed had a hard time buying fuel at $2.50... then wait until the price is back over $3+ (or even $4).

Food prices have already been going through the roof since the last QE fraud was initiated...

Our budget is really hurting these days... with only more pain to come when all the tax increases pop up in just a couple of months.

And guess who will get the blame for the even further destroyed economy - the newly elected Republicans... Mark my words (unless they take swift action to undo the destructive Obama policies and do something about the out-of-control FED.

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