With a host of physical commodity markets showing impressive upside action in the early days of 2010, it certainly seems like the world needs commodities. Unfortunately, it would appear that many see the influx of investment into commodities as a bad thing.
As usual our society remains fixated on instant gratification. We suspect that waves of uninformed officials and uneducated bandwagon journalists will foster desires to “do something” about “high prices”. After almost 30 years of market analysis, we are fascinated with the unwavering knowledge in the mainstream press that certain commodity prices are too high. Perhaps the pundits have a case that oil prices are expensive relative to “classic” physical supply measures, but the IEA projecting only a 2.3% decline in global oil consumption from its historical peak to the sub-prime recession trough suggests that even the worst economic conditions in 60 years weren’t enough to markedly slash world oil use. The IEA also expects that 2010 world oil demand will climb back above the 2007 peak that was estimated by the US EIA.
With December 2010 corn prices as recently as September trading within close proximity to their cost of production, low milk prices forcing a large contraction in the dairy industry and a doubling of gold prices failing to expand gold mining output, commodity prices aren’t too high, they are too low! With the increased cost of energy, transportation, processing, security and increased demands for environmentally-friendly or sustainable output, society simply can’t expect to have prices as low as they have been for most of the past 30 years.
Historically, commodity producers have received a small portion of the cost of the finished products, and with those producers periodically presented with deflated pricing, they face an unacceptable risk in ramping up production without the prospect of significant returns. In looking at charts of cost of production for corn and soybeans, it is clear that production in those markets needed support from the government for the better part of the last 15 years. In the book Fast Food Nation, the author suggests that farmers growing potatoes might be lucky to get 2 cents out of $1.50 spent on a large order of fries at a fast food chain. Another author is even suggesting that the high cost of oil could restrict commodity production to the geographical area where it’s produced, which highlights some of the backward thinking that is often directed towards commodity markets.
Certainly livestock producers were hurt by the ramping up of corn prices in 2008, but instead of liquidating a massive portion of the livestock herd because of a lack of profitability that in turn could create a shortage of meat, the prices of pork, beef and chicken need to rise to high enough levels to sustain an appropriate level of production to meet demand. In our forthcoming book Big World – Small Commodity Markets, we will highlight the need to ramp up production in almost every commodity market. At this point, it would seem the US government has too many irons in the fire to attempt to take over commodity production, too. In retrospect, rapidly expanding middle class across the globe, commodity output will needs to increase, and the best way to encourage that is to allow market forces to work.
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Daniels Trading is a relationship-focused commodity futures brokerage located in the heart of Chicago’s financial district. Founded in 1995, they have a history of providing effective and reliable trade executions to both individual traders and institutional investors around the globe. In addition to a focus on relationship and execution, Daniels Trading is a leader in providing ongoing education opportunities and resources for customers.