Skip to comments.By 2015 hard commodity prices will have collapsed
Posted on 10/20/2012 6:16:26 AM PDT by TigerLikesRooster
By 2015 hard commodity prices will have collapsed
Posted by Michael on September 16, 2012 in Commodities
For the past two years, as regular readers know, I have been bearish on hard commodities. Prices may have dropped substantially from their peaks during this time, but I dont think the bear market is over. I think we still have a very long way to go.
There are four reasons why I expect prices to drop a lot more. First, during the last decade commodity producers were caught by surprise by the surge in demand. Their belated response was to ramp up production dramatically, but since there is a long lead-time between intention and supply, for the next several years we will continue to experience rapid growth in supply. As an aside, in my many talks to different groups of investors and boards of directors it has been my impression that commodity producers have been the slowest at understanding the full implications of a Chinese rebalancing, and I would suggest that in many cases they still have not caught on.
Second, almost all the increase in demand in the past twenty years, which in practice occurred mostly in the past decade, can be explained as the consequence of the incredibly unbalanced growth process in China. But as even the most exuberant of China bulls now recognize, Chinas economic growth is slowing and I expect it to decline a lot more in the next few years.
(Excerpt) Read more at mpettis.com ...
Certainly Jim Rogers would be saddened to hear this.
$1,00,000 loaves of bread, but the good news is there will be plenty available at that price.
There is currently no oversupply of Corn, maize or wheat.
Cattle herd levels in Texas are very very low, due to the 100 year drought we experienced 1 year ago. It will take 5-10 years for the cattle herd levels to recover.
Now, there are feed grains that can rapidly outstrip demand.
Wheat, maize, corn can recover quickly.
Chicken & pork production can recover quickly. Cattle cannot. Cows typically have single offspring and a long gestation period. Herd levels recover slowly.
There have been price run-ups, but it is also tied to fuel, fertilizer and transportation costs.
AND the seed licensing mess concerning PVPA, title V, and patented species have made it an expensive legal nightmare. Seed licensing law is not simple nor cheap.
I assume this is good news from Brazilian cattle ranchers and US pork producers? Does lamb factor into the equation at all?
That drought spread up here to Iowa. Crop yields were amazingly better than anyone expected. Hooray to the plant breeders and the work they have done the past 20 years.
The worry here of course is the drought extending to next year. Have had some good rains the last couple of weeks so hopefully the soil will get recharged partially before winter.
Over a period of a year or two, commodities in general will hold their value in relation to devalued currency and their cost of production.
This looks like an advert for short-sell gambling. Good luck with that!
If he needed only gas for his tractor...he'd exchange only a few wheelbarrows of grain for a few gallons of gas. Oh, but the gas isn't available from his neighbor, it has to be piped in from half a continent away.
Same for each little item the farmer needs. So...what would the farmer's reaction be in such a downturned economy? I mean, he wouldn't--as a practical matter--even bother to produce that silo full of grain.
No. The farmer would cut production down to a level to what his own family and neighbors could immediately use, or use for immediate, local area barter. Rememeber, in a broken economy there are no trains accepting money or credit to haul a silo of grain to the regional exchange.
I.e., we all starve in the cities and suburbs.
It also overlooks another pesky little problem: If the farmer is growing wheat...it's likely that ALL of his neighbors are doing...EXACTLY THE SAME THING. They'd choke on all that wheat they try to barter, because their neighbors are...uh...bartering wheat, too. The plumber and hardware store owner can only eat so much bread.
To shed all that barterable wheat, they'd need railroads. A functioning commodities exchange. A means of converting grain to a stable store of value (money).
Thanks TigerLikesRooster. The late Julian L. Simon ping.
Better yet, how much does it cost for a loaf of bread at the local burned out, flash mobbed, empty store if only one hand is clapping?
This writer is arguing contrary to the current pronouncements of Goldman Sachs and the significance is that if this author is correct we are going to see a huge drag on the world economy with no engine anywhere to pull it out of the vortex. Europe is on the verge of disintegration or, at best, life-support and the United States is hurtling toward not just taxaggedon but a very real fiscal crisis.
The only real remedy for the American problem is growth but growth is not to be found anywhere in the world. To the contrary, Europe and China might produce drag rather than growth. I am sure the rest of the world is looking at the United States and fearing that we will be the drag.
If we are fortunate enough to have a Romney take office we might somehow emerge from a time of pain with our political and economic system relatively intact. Nevertheless, Romney will get the blame for any hard times and will be unable, unlike Obama, to blame his predecessor. If Obama keeps his office or if events simply overwhelm Romney, we will probably lose our precious and unique legacy.
In other words we are talking about our fundamental liberties, not just our standard of living, being swept away by an economic tidal wave.
I wouldn’t like to be in the prediction position when it comes to agricultural commodities because weather reigns.
Besides growing demand it was weather that sparked the run up in prices. One day there is a beautiful crop the next day it is gone or it can be slow and agonizing as it was this summer in the corn belt.
Every year or two, for as far back as I can remember clearly, which is 40+ years, authors (mostly more or less conservative in POV) have been foretelling the imminent collapse of the economic system, usually blaming it on debt.
Since this hasn’t happened, we are well into the end stage of the “Boy Who Cried Wolf” storyline.
But people generally don’t get the real point of that story. It’s not that the townspeople didn’t come to the assistance of the shepherd when he really needed them.
It’s that THERE REALLY WERE WOLVES. And when they finally showed up, the people weren’t ready for them and lost all their flocks.
For the first time, I’m wondering if the wolves may just be coming over the horizon today.
I strongly suspect that if we avoid a wolf attack this time around, it will only encourage and accelerate the behavior that makes their eventual arrival inevitable. Kick the can down the road a few more years.
You just reminded me of a McHale’s Navy episode where it was stated that a loaf of bread was 1,000,000,000 lira, as this old man remembers.
Was it John Maynard Keynes who said, in the long run there is no agriculture problem? In the long run my kids and grandchildren are going to see a world of wonders as technology continues to reinvent itself in shorter and shorter cycles. The problem is getting from here to there.
Oct. 1, 2010 to Oct. 1, 2011 we had 2-3/4” rainfall for 12 months. If there is a precedent to that it was in 1895. My ancestors had oral history of that one. They settled in this county in 1889.
Beginning in Mid Oct. 2011 we had normal rainfall until spring. Then we had a repeat of extreme hot temps and drought until about 1 month ago. Looks like an early fall and prospects of normal winter moisture. (impossible to predict for sure)
Cattle herds are very very low.
But what I described is in the Rolling Plains and the State of Texas is huge. Many areas are still deeply in the extreme drought category.
Cotton production was not good. Much of it will be shredded and not harvested. Wheat crop last year was about 1/2 normal production. Some producers harvested no none of their wheat. Looked like properly headed, but no grain inside. I think most of that was early 90 degree temperatures shutting down the plant growth. It was worst with early planted wheat.
I give plant breeders credit where it is due, but do not like the legal land mine field associated with seed licensing. We produce Certified and Registered wheat seed. My father has been doing that for many years and my brother and I just took over that part of the operation.
Farming was once a simple business, if you want to call it that. It is no longer. Most of the complexity, in my opinion, is due to lawyers and politicians and contributes little to production.
“Farming is easy if your plow is your pencil and the field is 1,000 miles away” ~Ike
Bartering grain for fuel is one thing,but what do I do when I need a new concave or rasp bars for my combine.Or new drive tires for my big John Deere tractor?
Besides,the government will come and steal all my stored grain in an emergency.
I put out that idea of bartering as a means to survive... no, it’s not a perfect way.
I know “wood” instead of food was a typo but it brought a few things flashing back into memory.
A couple of things most people living today don’t quite grasp is the degree of hunting for food that occurred during the Great Depression.
Wildlife numbers were seriously depressed even into my childhood in the late sixties and seventies. It was a fairly rare sight to see a deer even in rural North Carolina, to the point that a set of deer tracks was a noteworthy thing, talked about down at the country store.
So, any wildlife that can be hunted for food will rapidly be hunted down and numbers will fall precipitously, taking decades to recover after the emergency period of want has passed.
Second, the “wood” part ... have you looked hard at old Depression era photographs from the south and east? Even in the cities and towns, forestation was gone. Ornamental trees along city streets, in churchyards and such was all there was. Just cut over as far as the eye could see.
Cheap fuel for heating and cooking, I guess, plus cash strapped landowners selling it all to keep from losing it to the bank or a tax sale.
It will be an interesting clash between the government environmental regulations and raw, panicky need, should a full on collapse ever arise. Major soil erosion, possible Dustbowl II in some dryer areas.
I can see some good in undermining regard for overweening environmental regulation and restriction in the long term. In the near term it’d be like living on the face of the moon after a few years.
In the event of a currency/banking collapse I plan to hasten to the local restaurant supply where I will barter for a truckload of beans, rice, lard, flour, etc. I’ll bet the owner suddenly realizes he needs more arms and ammo.
Then I will have my employees re-package it in sizes from 1/4 lb. to 10 lb.
VOILA! The new currency of the People!
I’ve read that. I also disagree regarding commodity deflation. With all of the cash being essentially manufactured, the natural course for commodities and of course proxy money like gold & silver will be a price increase. I’m no expert though but I have been putting my money where my mouth is and slowly turning excess cash into gold and 90% silver.
Sounds like just about everyone I know.
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