Get 4 complimentary weeks of Bill Gary’s “Price Perceptions” from CIS

Bill Gary’s Price Perceptions is devoted to those who trade for large moves. This weekly newsletter is packed with tables, graphs, and easy-to-understand research. Its comprehensive analysis takes you “past the obvious!” It combines technical analysis with fundamental research and has enough confidence in its analysis to provide specific trading plans for each recommendation. Now you can try “Price Perceptions” for 4 weeks, go here to learn how.

In October 2004, we wrote an article for our subscribers entitled "US Commodities -- Too Cheap!" In that article, we explained that record US production had pushed grain prices to five-year lows. However, we pointed out the trade weighted dollar was declining and had made US grain prices historically cheap to foreign buyers. This would encourage global demand and discourage foreign production. The point was made that US grain and soybean prices were nearing "rock bottom" levels.

In November 2004, we followed up with another series of articles entitled "Transitions." Those articles compared the chronic grain surplus of the Sixties with the surplus period from 1997 through 2004. They then explained how abandonment of the gold standard in the early Seventies led to a decline in the dollar and an economic transition of historic proportions into the early Eighties. The article provided examples of how one commodity market after another exploded to historic price levels as a result of confusion and panic over the value of the world’s reserve currency… the Dollar.

Those articles and many others over the ensuing years brought into perspective not only the value of the dollar, but the surge in new commodity demand from Asia as well as the move by governments to utilize food for fuel. This year, our research and patience paid off as one commodity market after another reached new historic highs. Now the question is… Are commodity prices peaking, or will the historic advances of 2007 be extended into 2008 and beyond?

Some analysts are now saying commodity markets are in a "bubble" that is ready to burst. They point out the historically cyclical nature of commodities and how high prices curb demand and always result in greater production. Also, they cite the commodity bubble of the Seventies and the price bust of the Eighties as examples of what’s ahead. One argument for this view is the recent sharp price slide in copper, lead, and nickel that is attributed to the US housing decline and slowing economies in the US, Europe, and Japan. Will the economic slowdown into 2008 force other commodities to retreat?

We believe high priced commodities are here to stay. Some will retreat from record highs, others will languish, and yet others will move to even higher historic levels. Our reasoning is as follows…

Competitive Devaluations: Nearly all major nations continue expanding liquidity to remain competitive in world markets. Most Asian nations dependent on exports continue to peg their currencies to the weakening dollar. Some manipulate their currencies to remain below economic value of the dollar and Euro. Even Canada recently reduced interest rates and expanded liquidity to pressure their currency back below par with the US dollar.

Because US authorities are desperate to re-liquefy banks and Wall Street due to the sub-prime mortgage debacle, the Federal Reserve is pumping money into the system at unprecedented rates. This is pressuring the dollar, forcing other nations to also cut rates and expand money supply to remain competitive in global markets. Because financial markets are now a global function, it is apparent nearly all nations will continue expanding liquidity until the sub-prime problem is solved. This will put even more money in the hands of the most populated area of the world, Asia. Therefore, while Asian economies may slow in months ahead, disposable incomes should continue rising, generating even more demand for food.

Climate Change: Droughts, floods, hurricanes and record temperatures have been attributed to global climate change. If scientists are correct, erratic weather patterns will continue to plague food production for years to come. Although new lands will be brought into production, we can no longer depend on record yields, year after year, to satisfy growing Asian affluence and desire for better diets.

Water Shortages: Fresh water has become a major problem in China and India due to expanding industrial use, pollution, and population growth. These two nations with the world’s largest populations are nearing the point of not being able to produce enough grain to meet domestic needs. Competition for irrigation water in these nations and others will intensify in years ahead, potentially reducing grain and oilseed production.

Social Unrest: Increasing food prices in nations such as China, India, Pakistan and other developing nations have led to demonstrations and social unrest. While food accounts for about ten percent of the consumer price index in Europe and US, it accounts for nearly fifty percent in these nations. Therefore, governments in these nations are under extreme pressure to hold prices down to quell uprisings and protect their political future. These nations and others are taxing or banning grain exports to maintain adequate domestic supplies. Many have reduced grain and food import tariffs in an attempt to curb rising food prices. These governmental actions hold food prices artificially low, which stimulate even more demand and discourage expansion of domestic production.

Rebuilding Reserves: Many nations adopted "just in time" inventory policies during the late Nineties to reduce the expense of maintaining large food reserves. The lowering of trade barriers and the advent of the World Trade Organization promised quick access to world supplies in case of drought or temporary shortage. However, many countries are beginning to realize the error of not maintaining adequate reserves due to recent spiraling prices. An example of this dilemma is China’s corn situation. From 1999 through 2006, China’s corn reserves fell from 123.8 to 32.5 million metric tonnes, or 74 percent. Now, the USDA is projecting 2008 ending stocks at 28.1 million tonnes, a reduction to the lowest level in 30 years. Now, many nations are planning to rebuild reserves, which will only add to global demand in years ahead.

According to The Economist magazine, global food inflation reached 5.4 percent this year, the highest rate since 1980. However, during the 1972 to 1981 period, global food inflation reached 8.2 percent before Central Bankers began to tighten liquidity and force major economies into recession. To date, there is little indication Central Bankers are willing to tighten monetary conditions to curb food inflation. Also, the current downtrend in economic activity is centered on Europe and the US. Asian nations with the world’s largest populations are continuing to expand at much more rapid rates. Their domestic economies are picking up the slack in economic activity created by slowing exports. Bill Lapp, president of Advanced Economic Solutions, says: "The world is not going back to long term grain averages of $2.40 corn, $3.50 wheat or $5.50 soybeans."

Although markets will pull back from time to time during the next two years, each pullback should provide an opportunity for commodity traders to cash in on the structural change taking place in global food markets.

Get 4 complimentary weeks of Bill Gary’s “Price Perceptions” from CIS

Bill Gary’s Price Perceptions is devoted to those who trade for large moves. This weekly newsletter is packed with tables, graphs, and easy-to-understand research. Its comprehensive analysis takes you “past the obvious!” It combines technical analysis with fundamental research and has enough confidence in its analysis to provide specific trading plans for each recommendation. Now you can try “Price Perceptions” for 4 weeks, go here to learn how.