Commodity price breakouts in the mid-1970s
During one of the seemingly continuous Middle East Arab-Israeli conflicts, the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo on oil exports to the United States and other supporters of Israel in 1973, and also established production quotas in an attempt to control the supply of oil, leading to sharp increases in oil and gasoline prices as well as long lines at U.S. gas pumps.
Crude oil (NYMEX:CLU14) wasn’t alone in moving to new price plateaus. Grain and soybean prices also reached astronomical levels due to a confluence of unusual events:
- The “great Russian grain robbery” in the late summer of 1972 after crop failures caused Russia to come to the United States to buy large quantities of wheat before most U.S. traders realized what was happening.
- Extremely wet conditions in the fall of 1972 delayed the harvest of a significant amount of U.S. acreage until after the ground had frozen in early 1973, reducing the size of U.S. crops.
- Disappearance of anchovies off the coast of Peru due to the effects of El Niño, cutting into one of the main sources of protein in U.S. animal feeds. Demand for protein sent soybean futures prices to a peak of $12.90 per bushel in June 1973, causing U.S. officials to embargo exports of soybeans and meal.
- U.S. crop production problems during the “triple-whammy” year of 1974: late planting due to a wet spring; a suddenly hot, dry summer; and a Labor Day frost that cut yields.
The cumulative effect of these developments sent consumer prices soaring, raised government concerns about inflation and prompted various regulations to control markets — remember the WIN (Whip Inflation Now) buttons? The net result was an economic slowdown/recession that led to a sharp stock market setback. For traders, the mid-1970s will be remembered for their volatility that created a new world of both opportunity and risk.
The Fed makes its move
As the inflationary 1970s unfolded, the inflation rate rose from about 2% in the 1960s to double-digit levels by the end of the 1970s. The Federal Reserve seemed to have little control over the pace of inflation. Then, on Oct. 6, 1979, the Fed under Paul Volcker changed its focus from controlling interest rates to controlling the money supply.
Individual traders didn’t seem to realize the implications of that policy shift at first. It did bring inflation under control and eventually produced more stable conditions, but at the expense of interest rates that topped 15% and led to a sharp recession. More recently traders have learned to watch Fed meetings and statements closely for clues on monetary policy, particularly in the age of quantitative easing, but the 1979 Fed decision was a new experience for showing how much influence the Fed has on markets.