Posted by: usset001 | November 26, 2008

Speculative bubble?

moneydowndrainIt is tempting to join the crowd and explain the price action in commodities over the past three years – the boom and the bust – by calling it a classic speculative bubble. Speculative bubbles bring to mind a mania, where prices are divorced from the realities of supply and demand. Reviewng the scorched landscape of commoditiy prices , the past six months scream bubble. Were supply and demand even relevant?

I’ve made the argument that increased ethanol production changed the equation for supply and demand of all grains and oilseeds. Higher demand for corn has increased the price of corn. Higher corn prices, in turn, has increased corn production and decreased the number of acres dedicated to other basic crops like wheat and soybeans. Despite poor processing margins, ethanol production continues to expand because the construction of new plants began in better times. Don’t expect the pressure for more corn acres (and fewer acres for other crops) to ease.

Let’s look at the price changes of selected commodities over the past three years. I selected light sweet crude oil from the NYMEX as my proxy for energy related commodities. For metals, I chose COMEX copper (It’s tempting to use gold, but in troubled times the value of gold travels a different, non-industrial  route). For the soft commodities, I chose ICE cotton #2.

Price Changes in Selected Commodities, November 2005 to November 2008 (approximate figures) 

Nearby Futures Contract

Nov. 2005

High

Nov. 2008

3 year change

Light Sweet Crude Oil (per barrel)

$60

$145

$50

-17%

ICE Cotton #2 (per pound)

50 cents

90 cents

44 cents

-12%

Copper (per pound)

$2.00

$4.00

$1.65

-17%

Corn (per bushel)

$2.00

$7.80

$3.55

+75%

Soybeans (per bushel)

$6.00

$16.00

$9.00

+50%

Minneapolis Wheat (per bushel)

$3.80

$25.00

$6.35

+67%

My point here is simple. Nearly five months into the commoditiy crash of 2008, many different commodities are trading at prices lower than 3 years ago, but not corn, soybeans and wheat. It appears that supply and demand are part of the equation, and ethanol has had a lasting impact on grain and oilseed prices.


Responses

  1. Ed

    Do you think with the above reference that maybe we should consider corn, soybeans, sunflowers, and wheat at overvalued levels instead of the undevalued levels that many producers feel they are?

    Perhaps the commodities are overvalued and the other factors that go into the profit equation such as inputs and expenses are still going threw a slow decline because of the slow retail process durring declining markets?

    If fertilizer for instance was at it’s level that it was in 2005; I think producers would be selling all of their grain and then some instead of holding for the rally that may or may not ever happen.


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