25, 2006 -- According
to Lester R. Brown of the Earth Policy Institute, "cars, not people will
claim most of the increase in world grain consumption this year. The U.S. Department
of Agriculture projects that world grain use will grown by 20 million tons in
2006. Of this, 14 million tons will be use to produce fuel for cars in the United
States, leaving only 6 million tons to satisfy the worlds growing food needs." Mr.
Browns article paints a picture of the battle brewing between those that want
grain for food and those that want it for feul.
Mr. Brown also states, "investors are jumping on the highly profitable biofuel-bandwagon
so fast that hardly a day goes by without another ethanol distillery or biodiesal
refinery being announced somewhere in the world. The amount of corn used in US
ethanol distilleries has tripled in five years, jumping from 18 million tons
in 2001, to an estimated 55 million tons from the 2006." But how then, does
that explain why corn prices are historically cheap at $2.25 a bushel for nearby
Further, Mr. Brown says, "since almost everything we eat can be converted
into fuel for automobiles, including wheat, corn, rice, soybeans and sugarcane,
the line between the food and energy economies is disappearing. Historically,
food processors and livestock producers that converted these farm commodities
into products for supermarket shelves were the only buyers. Now there is another
group, those buying for the ethanol distilleries and biodiesel refineries that
supply service stations." But I ask, why are wheat, rice and soybean prices
historically cheap at $3.78, $8.99 and $5.43 respectively for nearby September
futures? Those farm commodities are as cheap as corn!
A key paragraph states, "as the price of oil climbs, it becomes increasingly
profitable to convert farm commodities into automotive fuel, either ethanol or
biodiesel. In effect, the price of oil becomes the support price for food commodities.
When the food value of a commodity drops below its fuel value, the market will
convert it into fuel." But crude oil prices ended this week at $74 a barrel.
At what point, does historically high priced crude oil, finally have a bullish
impact on historically cheap farm commodities?
According to Mr. Brown, "the stage is being set for a head-on collision
between the worlds 800 million affluent automobile owners and food consumers.
Given the insatiable appetite of cars for fuel, higher grain prices appear inevitable.
The only question is when food prices will rise and by how much." Mr. Brown
in this regard has joined the ranks of many in agriculture that also believe
the line of least resistance for grain and food prices is upward. But Mr. Brown,
like most other forecasters, offers no time table for the rise.
Early this week, a well known agricultural analyst was asked if grain and farm
prices would rise in value to try and keep pace with crude oil and precious
metals. His answer was lengthy but the one phrase that caught my attention
was when he said, "some day, the index funds will get hold of the agricultural
markets and press them to higher levels because the fundamentals are so bullish."
His use of the term, "press them" reminded me of a story about Abraham
Lincoln, 16th President of the United States, a man blessed with the ability
to use language of clarity and beauty. In a telegram from General Sherman it
was reported to Lincoln that General Lee's armies were retreating and several
thousand prisoners captured along with a half dozen generals. General Sherman
in the telegram predicted, "If the thing is pressed, I think Lee will surrender." Immediately,
Lincoln telegraphed back saying, "Let the thing be pressed." A few
weeks later, General Robert E. Lee and his Army of Northern Virginia surrendered
to General Ulysses S. Grant and his Army of the Potomac in the town of Appomattox
Court House, Virginia. The Civil War had finally come to an end. The US ag markets
are historically cheap because the near term fundamentals remain bearish. Over
the long run, things look quite different. Once the marketplace comes to grips
with the difference between the two outlooks, I expect, "the thing" to
Feel free to contact me at commodityinsight.com or 406-682-5010. I would enjoy
hearing your comments and thoughts.
(The information in this article is the opinion of Commodity Insight's Jerry
Welch and subject to change without notice.)