8, 2008 -- For the fourth time in two years, mainstream media, the talking heads, those that know not they know not are claiming that a top in commodity values has been permanently forged. They say that the Era of Rising Commodity Values is a done deal. Here are just a few of the headlines from this afternoon; "The Great Oil Bubble Has Burst." "US Stocks Surge on 'Watershed' Dollar Jump." Commodities Rush Could Be Over." Bloomberg.com stated, "Crude oil, corn and silver tumbled, sending the Reuters/Jefferies CRB Index to a four-month low, as a stronger dollar and slower economic growth eroded demand for raw materials.
Crude oil fell to the lowest since May, corn tumbled to a four-month low and silver touched its cheapest since January. The dollar had its biggest increase in almost eight years against the euro after European Central Bank President Jean- Claude Trichet said economic growth will be "particularly weak" through the third quarter. Fannie Mae, the largest U.S. mortgage finance company, said the worst housing slump since the Great Depression is deepening. "
No doubt, the current slide in commodity prices the past month is record setting in such a short period. The CRB index which represents a wide array of commodities is down 17 percent, crude oil, ("the stick that stirs the drink") is off 20 percent, natural gas prices have slipped 40 percent, soybean prices 25 percent, corn prices have hit the skids by 32 percent and cattle futures for the spring of '09 are down 10 percent. For the past month, investors and speculators buying commodities or agricultural producers that were unwilling to sell or hedge production have lost a huge amount of money. Or, let historically high prices slip through their fingers by not hedging.
From a percentage level, the current washout is huge. There is no denying that fact. But looking at the flat price of any commodity and you understand quickly that values, despite the sell off remain historically high. The recent slide came about because, "the best cure for high prices is high prices." The marketplace simply did and is doing what it always does.
To understand how lofty in price most commodity markets remain, look at the corn market. From the highs set in July to the lows set this week, the market has dropped about $2.81 a bushel. In December '05, corn prices were $1.90 a bushel. The slide in prices this month is greater than what corn was worth three years ago. Compare and contrast the price of any commodity today, to prices seen several years ago and you pretty much see the same thing. Crude oil for instance, in the midst of a record collapsed, closed out the week at approximately $115 a barrel. A year ago this coming week, crude was selling for $68 a barrel.
There are always several forces at work that set prices in the marketplace. Greed sends prices soaring to unsustainable levels and fear sends prices below true economic value. Greed is always reversed as some cure for low prices is low prices. Those forces never change and never will.
All my work shows that the panic selling, the fear that has blanketed the commodity markets over the past month has just about run it's course and should be followed by a new bullish wave of buying. I predicted last week in this column that the lows across the board should be set between August 12th and August 15th and I am sticking with that outlook. Granted, if the "stick that stirs the drink" collapses further and the dollar continues to rally, a bottom in commodity values may be put off until later in August. But end users of commodities, those in need of forward coverage to protect themselves from rising prices should not wait until late August to be a buyer. Livestock producers should be purchasing at least 50 percent off all soybean meal and corn needs now and not wait for lower prices.
As we approach mid summer, commodities remain highly vulnerable to a meaningful upside reversal. Late plantings for corn and soybeans puts both markets in a position to be impacted by an early frost or wet harvest. The hurricane season is far from being over which will impact crude oil. And recent history shows that every few months for the past 8 years some sort of crisis surfaces in the Mideast that also boosts hard asset markets such as metals and energy. Another bull run for commodities is a distinct possibility now that prices are in the midst of the worst one month decline in history. Prices are cheap.
If you wish to see the strategy I favor at this point, log onto commodityinsite.com. It is there for all to see.
(The information in this article is the opinion of Commodityinsite.com's Jerry Welch and subject to change without notice.)