Frankly, I don’t think the banks that received government (TARP) money are the only ones undergoing stress tests these days. Almost everyone I know is a bit more tense than usual, me included. Why? Name it: work, play, life in general. Maybe it’s because business isn’t as “easy” as it used to be, maybe it’s because our retirement plans have hit the skids, maybe it’s because we continue to be bombarded daily with social networking messages from Facebook, Twitter, LinkedIn (name it) contacts. Whatever it is, it certainly isn’t because Citibank or Bank of America need to raise capital. That, candidly, is the least of most people’s worries.
Case in point: The other day I was debating inflation with my managing editor, Dan Collins. His contention was we already have inflation, it’s hyperinflation we need to worry about. My contention was inflation was relatively low, and I made the point about the CPI. I chided him for leaning so heavily on Shadowstats.com, and urged him to look at what people actually see. And he came back with: “I am looking at what people see, when they go to the gas pump, coffee shop or grocery store!” and it gave me pause. I was the one falling into the government report trap, not he.
Although commodities might have had a downturn in the several months after last year’s huge rally, those days look to be over. It seems almost every world crop is headed higher, including softs, energies, metals and grains. In some of these cases, the commodities were oversold. But in the case of grains, there are more factors at work. And whereas the financial sector can affect our savings, investments and trading accounts (for those who have any of these), commodities affect everything we touch, whether it’s the bread we eat, the gas we pump, the coffee we drink, or the clothes we wear. We are impacted any time we enter a store.
This month we spotlight grains (see “The ‘Physinomics” of grain,” by Chip Flory), which last year were hitting highs every day...soybeans even hit the teens. A combination of factors helped spur grains to those incredible rallies, including energy prices (crude oil over $100 a barrel), alternative energy pushes (ethanol production) and in some areas drought.
This year, other factors play into the pricing. Corn, which was the crop of choice to grow last year, will see lower plantings than the last two seasons. That reduction could give corn a healthy price base, but its hot hand, especially as an alternative fuel additive, has decidedly ended, at least for now.
Soybeans prices will be a global if. Carryover was lower this year due to the desire to grow corn, so that will put upward pressure on price. And globally, if China continues to be a big buyer, prices, although lower than the last two years, could percolate in the $8 area.
The weakest performer could be wheat, which had a healthy carry over; that is to be repeated this year as demand falters.
All these outlooks might be good news for the consumer. Prices seem to be normalized. For example, energy prices, although higher, probably won’t see the excess of last year, and the dollar, despite its meandering, should also maintain a range. For traders, the stress test will be in catching those weather-related rallies or finding the best long-term trend. And though no one should discount those weather-related spikes, one thing that probably won’t repeat this summer is beans in the teens. But who knows? As they say in sports, that’s why they play the game.