Wednesday Commodities Round-Up; Agricultural

The last few times I have posted this chart, I have speculated it was forming a double top. While this is still looking like a strong possibility, there is also the possibility that prices are consolidating in a rectangular/triangle top. We won't know until we see prices break up or down. However, the good news from an inflation perspective is that prices have at least stopped their upward move and are consolidating.



On the daily chart notice the following:

-- Prices are below all the moving averages

-- The 10 day SMA has crossed below the 50 day SMA

-- The 20 day SMA is about to cross over the 50 day SMA

-- The 10 and 20 day SMA are both heading lower.

The SMA picture is bearish, but for this chart to turn completely bearish, we need to see a strong break below the low point between the double tops -- roughly 400 or so.

Food Cost Increases Leading To Increased Price Controls

From the WSJ:

Last month, China said it would require producers of pork, eggs and other farm goods to seek government permission before raising prices. When producers do seek permission, it is denied, market participants say. Thailand is taking similar steps on instant noodles and cooking oil, while Russia is trying to cap prices on certain types of bread, eggs and milk.

Elsewhere, Mexico is trying to control the price of tortillas, and Venezuela is capping prices on staples including milk and sugar. Malaysia is setting up a National Price Council to monitor food costs and is planning stockpiles of major foods, as well as a 24-hour hot line for consumers to vent about spiraling food costs.

These measures reflect the mounting pressure on developing economies as food costs rise sharply. Food-price inflation is running at an 11% annual rate in major developing countries, up from about 4.5% in 2006, according to Bank of America Corp. The price rises partly reflect increased demand from emerging markets and higher oil prices, which drive up the cost of growing and transporting food.

In Singapore, inflation accelerated to a 25-year high in December, partly because of food. In Mexico, Malaysia, Pakistan and Indonesia, food-price increases or shortages have triggered protests. Late last year, three Chinese shoppers were trampled to death in a supermarket scuffle over cooking oil. In poor Caribbean nations like Haiti, the situation is especially dire.

There is good and bad news to increased prosperity. The good news is everybody is making more money, which increases the standard of living. The bad news is increased standard's of living increases overall demand for food. Making that situation more difficult is the US' use of ethanol, which has really complicated the corn market -- and not for the better.

I have reprinted the following chart many times over the last year or so, and will continue to do so.



This is a chart of agricultural prices as represented by the Goldman Sachs commodity index. It shows a 133% increase over the last 3 years. In addition, the chart is a clear bull market chart with higher highs and higher lows.

A look at the various components of this chart shows the exact same pattern:



Wheat had a huge price spike last year, nearly doubling in price. While the 950 area is offering strong resistance right now, a move through that area would indicate a continuation of the market's bull run.



Soy has been in a bull run since late 2006, with a clear pattern of higher highs and higher lows.



Corn is showing an strong rally as well, with prices doubling in the period of about a year and a half.

At some point, these price increases have to bleed into prices at the retail level. While governments are attempting to thwart the pain at the retail level, price controls will eventually push producers out of the market as their profits go away -- or encourage them to produce inefficiently, which is the last thing they need right now. The only way to deal with this problem is to increase supply in a big way.

What Inflation?

From Bloomberg:

The UBS Bloomberg Constant Maturity Commodity Index of 26 commodities climbed 22 percent last year, its sixth straight annual increase, powered by advances in wheat and soybeans. It was up 9.29 at 1,314.907 at 1:25 p.m. London time. The Reuters/Jefferies CRB Index of 19 raw materials gained as much as 1.11 to a record 367.97.

And consider these points:

Gold and platinum rose to records for a second day and crude oil traded near $100 a barrel as the dollar's slump enhanced the appeal of raw materials as an inflation hedge.

Agricultural commodities also rallied as wheat had its biggest two-day increase in four months, palm oil reached a record, soybeans traded near a 34-year high and corn neared an 11-year peak. Metals including gold, which rose beyond $850 an ounce for the first time yesterday, have more to gain, Evy Hambro, managing director of BlackRock Investment Management Ltd., said today.

Consider the following charts:



Corn has broken through key resistance areas twice in the last two years. In addition, it has broken out of a trading range that lasted for 8 years. An old adage among traders is the longer the base, the stronger the break-out.



Like corn wheat has also broken out of a long base. It spent the last few months of 2007 consolidating its gains.



Platinum is in the middle of a 6 year rally. Notice the strength of this rally -- it continues to push higher and higher in a disciplined manner.



Gold is also pushing to new highs. Notice it has broken through hey resistance levels twice in the last few months.



soy beans have moved into record territory as well, again breaking through key resistance over the last month.

Notice an important common feature to all of these charts: they are all "breaking through key resistance areas. That's an incredibly important fact; it indicates the bulls are running across a variety of commodity prices.

Agricultural Prices Increasing

I've talked about agricultural prices a lot, largely in the context of inflation. The chart below explains why these prices are really important right now.



For the last three years, agricultural prices have been increasing. The chart above shows an incredibly strong chart that is a great example of a bullish chart. Prices formed a strong base in 2005. They rallied from the base and then consolidated in a bullish pennant formation in 2006. After selling off a bit, prices again rallied into 2007 where they again consolidated in two patterns -- a broadening pattern and then a triangle pattern. Prices have risen twice since then. In short, this chart says prices are increasing and will be for the foreseeable future.

From Bloomberg:

Wheat futures gained in Chicago as rising food costs signaled increased demand for the grain at a time of shrinking global stockpiles. Corn and soybeans declined as recent advances may have been overdone.

U.S. consumer prices rose the most in two years last month, while inflation surged 6.9 percent in China and 3.1 percent in Europe. Inflation is accelerating as oil and other energy prices reached records in November, spurring investors to buy commodities as a store of value.

``The global backdrop of inflationary pressure is supportive for agricultural products as we head into 2008,'' Nie Ben, manager at Liaoning Cifco Futures Co., said by phone from Dalian in northeastern China today.

.....

Corn reached a nine-month high yesterday at $4.4325 a bushel, while soybeans extended a rally to the highest since 1973 on speculation that U.S. demand for fuel made from grain and oilseeds will surge. The Senate passed a bill Dec. 13 that may boost use of alternative fuels such as ethanol and biodiesel.

Let's look at some of the individual charts:



Except for a price spike in early 2004, corn traded in a 20% range for 8 years. An old trading saying is the longer the base, the stronger the rally. If that holds, we're in for one hell of a bull run.



On corn's weekly chart, note it has been in a bull market pennant pattern for most of this year. This is a classic consolidation pattern. Also note that prices are making a move to break out of this pattern and move higher.



The monthly soy chart shows prices have been here before.



But, for the last two years, soy beans have also rallied. This is another example of a bullish chart. Note the continual pattern of higher highs and higher lows. While soy beans have been here before as the monthly chart demonstrates, this week chart shows there is every reason for prices to continue higher.



Like corn, wheat was in a pretty tight range for 8 years.



But since then, prices have clearly rallied. They broke out of their base in late 2006. From the end of 2006 through the first quarter of 2007 prices consolidated. Then they broke out. The only drawback to this chart's bullish angle is the possible formation of a double top this year.

Short version: agricultural prices are in a strong position to continue moving higher.

Agricultural Price Inflation Will Be With Us Awhile

from the WSJ:

In the past, such increases have been caused by temporary supply disruptions. Following a poor harvest, farmers would rush to capitalize on higher crop prices by planting more of that crop the next season, sending prices back down. But the current rally, which started a year ago in the corn-futures trading pit at the Chicago Board of Trade, is different.

Not only have prices remained high, but the rally has swept up other commodities such as barley, sorghum, eggs, cheese, oats, rice, peas, sunflower and lentils. In Georgia, the nation's No. 1 poultry-producing state, slaughterhouses are charging a record wholesale price for three-pound chickens, up 15% from a year ago.

What's changed is that powerful new sources of demand are emerging. In addition to U.S. government incentives that encourage businesses to turn corn and soybeans into motor fuel, the growing economies of Asia and Latin America are enabling hundreds of millions of people to spend more on food. A growing middle class in these regions is eating more meat and milk, which in turn is increasing demand for grain to feed livestock. In the U.S., a beef cow has to eat roughly six pounds of grain to put on a pound of weight, and a hog about four pounds.

This is an incredibly important story for several reason.

1.) It highlights how incredibly ridicules the Fed's "core inflation targeting is. The Fed's theory as to why core inflation is important is highlighted in the first paragraph. However, the real reason for the run-up -- which should be the Fed's stance -- is highlighted in the third paragraph. Demand for basic commodities is increasing, which is going to drive up prices for a long time. Hence, core inflation targeting is the dead-wrong inflation policy for the Fed to be targeting.

2.) Consumer spending. As food prices increase food expenditures take more money out of take home pay. This decreases the amount that consumers can spend on other goods and services. Considering consumer spending is responsible for 70% of the US' GDP growth, this has profound implications.

Here are some futures charts. Notice they are all trending up.

Corn:



Oats:



Soybeans:



Wheat:



And notice how higher agricultural prices are bleeding into livestock prices:



My biggest fear is the Federal Reserve is going to miss this boat entirely which has terrible policy implications for the US.

Milk Prices to Increase

From the WSJ:

The recent rise in milk prices is affecting everyone from small dairy companies like Oberweis to the nation's largest milk producers and food companies. On Friday, the Agriculture Department, which regulates the minimum milk prices received by farmers, set the price that processors will have to pay for drinkable milk in July at $20.91 per hundred pounds of milk, up 17% from the June price and up 84% from a year earlier.

In the past few months, several factors have reduced the supply of milk world-wide or raised its cost of production. The European Union is ending subsidies on dairy exports, and a drought in Australia has cut the supply of milk available to Asia. In the U.S., some dairy farmers are raising milk prices to offset the higher prices they pay for cattle feed as corn prices rise. Corn is a key feed ingredient.

As processors pass their higher costs on to consumers in the form of more-expensive cartons of milk at the grocery store, it will add to the strain on many family budgets already stretched by higher fuel and energy costs. In May, the average price of a gallon of whole milk in the U.S. was $3.26, up 6.2% from $3.07 a year earlier, according to the Labor Department.

Stories like this highlight why only looking at core inflation is a ridicules way to analyze inflation. Food and energy are commodities that everybody consumes on a regular basis -- regular as in everyday day of their lives. These prices make a strong imprint on people's buying habits.

In addition, this shows what is happening underneath the food market as a result of the ethanol situation. The increased used of blended fuels has increased demand for corn. However, there has not been an increase in corn supply commensurate with demand. As a result, corn prices have increased. Here is a weekly corn futures chart. Notice the big jump in prices that started last last year and the price consolidation that has gone on for the last 4 months or so.



The US food system is partially based on corn. Cattle are fed corn; sweeteners used in a variety of products are corn based. In short, corn is the agricultural equivalent of oil or natural gas. And it's price is going up, which is already starting to ripple through the US economy.

Agricultural Prices Increasing

The Big Picture has a story at the top of the blog on agricultural prices. It's been awhile since we looked at those charts, so lets see what a chart of the Goldman Sachs Commodity Index looks like.

Here's the daily chart:



Prices have spent the last 3-4 months consolidating right around the 260 level. But they have increased since then, moving above resistance at 293. All of the moving averages are rising. However, the price level is pretty far above the 20 day SMA. This implies the market may consolidate or move back to those levels.

Here's the weekly chart:



Notice there are three areas of consolidation that last at least nine months each. These provide a solid area of support for the moves upward. Also note the 50 and 200 day SMA are moving up. The 20 day SMA is also increasing, but that indicator has stalled in a range right now.

Short version -- agricultural prices are increasing. And there are a lot of technical and fundamental reasons for this increased to at least remain the same or move higher.

Agricultural Prices Rising Around the Globe

From the WSJ:

Soaring prices for farm goods, driven in part by demand for crop-based fuels, are pushing up the price of food world-wide and unleashing a new source of inflationary pressure.

The rise in food prices is already causing distress among consumers in some parts of the world -- especially relatively poor nations like India and China. If the trend gathers momentum, it could contribute to slower global growth by forcing consumers to spend less on other items or spurring central banks to fight inflation by raising interest rates.

Politicians in markets where food costs are a particularly sensitive matter are moving to counter rising prices before they take a bigger economic toll or fuel unrest. But it remains unclear whether those policies will be enough to contain the current pressures, or whether a longer-term bout of food-price inflation -- similar in ways to the recent climb in prices for oil and other commodities -- is in the offing.

The last three months the US has seen larger than normal increases in the food components of the CPI and PPI. One of the main reasons is the change to ethanol based fuel in the US. This has greatly increased US demand for corn, which in turn has increased corn prices etc...

Here is a chart of the agricultural futures. It shows the two year increase in agricultural prices. This is another area of inflationary pressure the Fed is probably concerned about.

Increase In Corn Crops Hits Ag Prices

From Barron's (subscription required):

U.S. FARMERS INTEND TO CARPET the country with corn this spring, chasing the dollars being printed at the local ethanol plant. The U.S. Department of Agriculture on Friday estimated prospective plantings of corn at 90.45 million acres, the highest since 1944. This is roughly a 12-million-acre jump over last year's planted acreage, as the exponential growth in ethanol demand has pushed corn prices above 10-year highs. The jump in prices has been widely followed outside the agriculture markets; indeed, not since the movie Trading Places, in 1983, have people been so interested in farm data.

The grain industry was expecting a hike in corn acreage this spring, but this was about 2 million acres more than expected. Chicago Board of Trade corn prices swooned Friday, falling to their daily exchange-imposed price limit of 20 cents. The May contract ended the session at $3.7450 a bushel, a drop of 28.75 cents on the week.

The sharp fall in prices doesn't mean the bull market for corn is over, however. Prices could decline for several sessions, but they already are off their February highs -- by 16.6% for the May contract and 10.8% for the December contract (which represents the fall harvest).

I've been following agricultural prices since the latest CPI and PPI release. In the last three reports, food prices increased at a faster rate. Here is a daily chart of the agricultural price index:



While the chart broke the uptrend in early March, we still have support at two levels before prices break from their current trading range.

Here's a weekly chart of prices.



Notice the uptrend is still firmly intact.

Agricultural Prices Still At Dangerous Levels

Here is a chart of agricultural futures. Remember that in both CPI and PPI, agricultural prices have been spiking for the last three months. In conjunction with oil prices, these price increases may be large enough to keep the Federal Reserve on hold for an interest rate cut unless the economy really tanks.