Federal Reserve Inflating Bubbles Pushing Agri-Foods to New Highs
Commodities / Agricultural Commodities Nov 06, 2010 - 06:09 AM GMTBy: Ned_W_Schmidt
Readily acknowledged is that first action of new U.S. Congress should be to call for resignations of all members of the Board of Governors of the Federal Reserve System.. Their irresponsible acts to date have clearly violated their mandate to provide a healthy economic environment. With Federal Reserve Bubble III, manifesting itself in the inflated and unnatural values for non dollar currencies, distorting the global economic system, they must be removed immediately and most recent policy action nullified.
With the Federal Reserve Currency Bubble comes, as always, those that benefit. As above chart portrays, one of those beneficiaries has been Agri-Food commodity prices. Our Agri-Food Price Index continues to set new highs. On the other hand, we continue to show the miserable performance of U.S. equities, a consequence of Federal Reserve and Obama Regime mismanaging the U.S. economy.
As evident in chart to the right, Agri-Food commodity prices have matched the highly touted returns in $Gold. Over time the return on Agri-Food commodities should be higher than that for $Gold. When $Gold is harvested, a goodly part of it goes into storage to last forever. When Agri-Food commodities are harvested, they are eaten and disappear.
Double digit real growth is hard to achieve in the world today. However, as this next chart portrays, U.S. grain exports are this year's growth industry. This chart, from USDA data, is for the Big Four, corn, soybeans, wheat, and rice. Measurement is in tons, not dollar values.
Bar on left is the year-to-year change in Big Four grains already exported by U.S. Agri-Producers this crop year. Middle bar is for export sales that have not yet been completed. Final bar on right is for total of first two charts. How many industries are reporting double digit real growth? And remember, these are staple grains, not iPads.
Why have Agri-Grain demand and the prices of those Agri-Grains risen so dramatically?
First, Agri-Food demand from the world, driven in large part by China, is straining the capability of the global Agri-Food supply system. China is now a net importer of soybeans, corn, and beef. That list will continue to expand.
Second, the global Agri-Food system is now operating in the price inelastic portion of the long-run supply curve. That means that prices rise more than the percentage change in demand. See The Joy of Agri-Food Price Inelasticity.
Thirdly, the ongoing effort of the Federal Reserve to unilaterally devalue the U.S. dollar is lowering the real price to the world of U.S. grains. A falling dollar makes U.S. Agri-Food production a bargain for foreign consumers. That policy is raising dollar value of Agri-Grains because the value of the dollar is less. Part of the inflation that the Federal Reserve hopes to achieve with devaluation of dollar will arrive in the form of dramatically higher food prices. Question: Will U.S. consumers be able to afford to eat if the Federal Reserve continues its policy of dollar devaluation?
In the chart below, highlighted by arrow, is the ongoing devaluation of U.S. dollar engineered by Federal Reserve. If that group of intellectually inbred academics is allowed to fully implement their dollar devaluation, world will continue to reinvest their dollars in Agri-Food commodities and other real assets like $Gold rather than hold dollars. Eating will become more expensive, but that is part of the stated goal of Federal Reserve policy. More inflation is its goal.
On the other hand, the inverted parabolic curve portrayed in that curve is a coiled spring. Probability of a move counter to that over zealous selling of the U.S. dollar is increasing. Parabolic curves, normal or inverted, due ultimately correct. Were that not true the NASDAQ Composite Index would be at "10,000" and oil would be at "$250."
A large "dollar premium" has been built into all commodity prices. When the dollar reverses path, that "dollar premium" will be removed. And quite simply, world is not likely to tolerate a group of intellectually inbred Keynesian ideologues to unilaterally devalue the dollar. Such a development could create a major opportunity for investors as those assets, $Gold, Agri-Equities, etc., remove the "dollar premium" from prices.
Economic growth in China and India will create the largest middle class in history over the next decade, more than a billion people. As their incomes rise, they will eat better. Global demand for Agri-Foods will continue to rise, and bump against a price inelastic long-run supply curve. As a consequence, Agri-Investments are likely to be one of the most lucrative investment themes for the decade ahead. Investors should be researching this sector now, awaiting those always inevitable corrections and consolidations that can be used to make timely investments.
By Ned W Schmidt CFA, CEBS
AGRI-FOOD THOUGHTS is from Ned W. Schmidt,CFA,CEBS, publisher of The Agri-Food Value View, a monthly exploration of the Agri-Food grand cycle being created by China, India, and Eco-energy. To contract Ned or to learn more, use this link: www.agrifoodvalueview.com.
Copyright © 2010 Ned W. Schmidt - All Rights Reserved
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