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CATTLE TODAY

COMMODITY INSIGHT

by: Jerry Welch

August 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 September futures?

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 be pressed.

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.)

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