China says that its economy grew 7.7 percent last quarter and is stockpiling pork, cotton, wheat, peanuts and a host of other commodities into strategic reserves adding to demand.
They are paying their own farmers $10 per bushel for wheat, $9.50 for corn, more than $20 for soybeans and more than $1.30 per pound for cotton – all prices that you can buy those commodities for much less here in the U.S. and make a lot of money when exporting to China. The trade was disappointed that China’s growth rate wasn’t 8 percent, but that was splitting hairs from a full croft while other economies around the world have bald spots.
China is still the best engine of commodity demand around and there is really no evidence of any significant slowing of consumption. China’s strategic commodity reserves are essentially the world’s reserves. Pigeon flu put a temporary hesitation on demand but doesn’t appear to be epidemic. They have bought out last year’s U.S. soybean crop despite normal production in South America.
Central banks around the world are still printing money. After the financial crisis, South Korea devalued 45 percent. This got their economy going strong. The Japanese were bugged by that and it took them a while, but they decided to devalue the yen to regain some competitive advantage lost. They say they plan to print enough yen to produce 2 percent inflation. Are they really so good as to be able to hit such a number?
Inflation is a mindset, and I doubt that they can control the perception of inflation to such a degree. People respond to inflation, or they don’t, and when they respond you get more inflation. It will not be so easy to shut off if they get it started.
The Fed is still into quantitative easing with targeted asset purchases. It has worked to raise asset values, but not so much to help employment to recover. Unemployment rose in 26 states in March and the sequester will dampen job growth recovery some more. Neither of the Feds employment or inflation targets are likely to be hit any time soon so the bubble in the bond market is keeping inflated.
The bond market bears may have to run out of air first. People’s retirement funds have recovered with the stock market and home values now recovering as well. That has to have a calming impact on consumers. They are still not convinced that it is lasting, but the gold market seems to think so. The talk show hosts who feed off the world being a terrible place with the country going straight to heck have been hawking gold for a living. I doubt they have run out of hyperbole and gold being cheaper will draw some more buyers in.
With the world’s central banks all printing money seeing inflation progressively as something good rather than bad, it is hard to see that as bearish for commodities. If the world economy slows they will print even more. They can’t get inflation going until the velocity of money speeds up, and that will take an extended period of easy monetary policy. Congress has gotten diverted from its focus on fiscal policy by issues such as guns and immigration that they see as more politically compelling to address.
How printing money can be bearish for commodity prices is a new one for the economic books. They have 30 percent inflation in Argentina, and farmers there use soybeans for currency. Farmland in Brazil is still sold in “sacks of soybeans per hectare” because of the legacy of inflation in that country.
The only reason that the U.S. dollar has risen against other currencies is that the U.S. economy is the least ugly of all the ducklings, and Japan is the latest to blatantly use currency devaluation to gain a competitive advantage. There is a global currency war of cold cash heating up. The one with the strongest currency loses.
An example of weather volatility is in the Mississippi River, which has gone from the Corps having to blast rocks to keep the channel open to having to close locks because of high water levels.
The snow pack over the Dakotas, Minnesota and the Canadian prairies got bigger this past week instead of melting away as it should be doing basis the calendar.
How much impact that this has on yield potential has yet to be seen, but as I have commented, the unusually late spring will lengthen the old crop demand window by delaying access to new crop production enough to eliminate the advantage those USDA economists gave the corn market bears in the latyest stocks report.
Soil temps are cold so that the crop will start slow when it does get planted. The one thing last year’s drought did was hurry the timing of harvest albeit at the expense of yield.
Planting later is not going to help the yield or add to old crop stocks as happened a year ago. Any corn shortage will be in August through September. I think September corn will be old crop this year. The 40-week cycle low in corn due in July is the biggest technical factor keeping me cautious.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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