Tuesday, May 24, 2011

High Commodity Prices and the Slowdown

I believe one of the reasons for the current slowdown is high commodity prices. And while oil an gas get all the attention, I believe that food prices share a fair amount of the blame for the latest slowdown. As I noted a little over a week ago, the latest retail sales figures show that food spending is still increasing at the expense of other retail consumption.

So -- let's take a look at the long-term charts of the three grains -- wheat, corn and soybeans -- to see where we are in the price cycle.

Corn is near all-time highs.

Soybeans are near an all time high, but haven't made a strong advance this year and are currently consolidating.

Wheat is off from highs, and hasn't made a strong move higher all year.

However, consider this from Bloomberg:

Funds cut their bets on higher commodity prices by 15 percent in a week after the worst rout in two years, reducing positions in everything from copper to oil on mounting concern that global growth is slowing.

The funds held a net 1.23 million contracts across 18 U.S. commodity futures as of May 10, the lowest since July, data from the U.S. Commodity Futures Trading Commission show. The net-long position in crude oil slumped 13 percent in a week, while for copper it fell 59 percent and in silver 23 percent.

The Standard & Poor’s GSCI Index of 24 commodities fell 11 percent in the week ended May 6, the biggest drop since December 2008, as investors fretted about the end of monetary stimulus in the U.S., higher interest rates worldwide and Europe’s sovereign debt crises. At least two dozen nations and the European Central Bank raised rates this year, data compiled by Bloomberg show.

The “pressures that have been building in emerging markets in terms of inflation and rapid interest rate hikes, coupled with the end of the quantitative easing program in the U.S. plus what’s going on in Europe, we have a lot of uncertainty around the extension of aid to Greece, you put all that together, that doesn’t paint a very rosy picture,” said Francisco Blanch from Bank of America-Merrill Lynch.

“It’s not the end of the commodity bull market but it could take some of the steam off for a few months,” the bank’s global head of commodity research said in an interview with Susan Li on Bloomberg Television’s “First Up.”