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Don't Cows and Chickens Have to Eat?

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February 04, 2011 – Comments (0) | RELATED TICKERS: JPM , GS , CORN

Hey Deej,

You have been making the case that the soft commodity price increases are primarily due to the Government incentivising ethanol production at the cost of food. I have made the case that the increases are due to global warming caused extreme weather events, which in turn cause crop losses.

As evidence we have both pointed to higher grain prices, and also to higher prices for beef and hogs because of the higher price for feed corn. According to the USDA the price paid to farmers for beef cattle has gone from $82.00 in Jan 2010 up to $106.00 in Jan 2011. The price paid for hogs has gone from $48.40 up to $54.60.

But there is a hole (actually more than one) in both our theorys. The price dairy farmers are getting for milk has gone from $16.10 to $16.20 which is almost unchanged. Broilers have gone from $.48 to $.45 cents. Eggs have gone from $1.03 down to $.85 cents.

Don't cows and chickens also have to eat?

You actually made an excellent point in the title of your first post on the subject on Jan 13th, "Great for investors who saw it coming", which is actually not true, if only as compared to gold, copper and the S&P 500. My picks of JJG, JJA and RJA are lagging the S&P, and are in the red. Right now if you google the subject, there are dozens of hits concerning high food prices and trading "opportunitys", mostly from investment websites that were not there only one month ago and there is a lot of cut and paste. Hi volume media outlets are being fed and are running the same story. Six months ago when when this was still investable information there was a very loud silence.

In Jan 2010, farmers were getting $3.66 for a bushel of corn. In Jan 2011 farmers are getting $5.37. You told us that "As of 1/17/11, corn was trading for $6.48/bushel". Presumably that was for March, but further out, futures are trading below that. That is an awful big price jump when two of the biggest corn buyers, ADM and Cargill are gloating that they have their corn at much lower prices.

I think that right now, both of us are wrong because soft commodities are in a short term speculative bubble outside of the trends either you or I have concerned ourselves with. I think any trend due to corn ethanol subsidies has mostly run out with corn ethanol production up to 12 billion gallons and the subsidy capped at 15 billion. I think my trends of growing demand from the worlds higher incomes at the expense of the worlds lower incomes, and the increased likelihood of crop failures due to increased climate related extreme weather events is still in place. But there is a big difference between making a long term bet on a long term climate trend, and a short term bet on next months weather.  

Enough bad weather this spring could easily skyrocket prices, but a little well publicized bad weather could skyrocket speculation too. But if you are entering the soft commodity trade right now, the safest bet is probably JPM, or Goldman Sachs.

Best wishes and beware of popcorn,

Steven

 

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