Get set for dysfunctional commodity trading system to take us on a ride again

 (article by Caroline Henshaw, “World corn prices to rise 35%, firm says” published by Dow Jones Newswires)

LONDON (Dow Jones)–World grain prices could rise up to 35% from already historically-high levels in 2011-12 if a rebound in global production comes in line with recent decades, said a report from Renaissance Capital.

Analyst Charles Robertson said growing demand, especially for corn, is likely to eat into already-low world stocks even without a feared cut to yields from poor weather.

“We can easily imagine a 35% rise in corn prices and a 25% rise in wheat prices from August 2011 to July 2012,” said the report. “The food-price threat for 2011-2012 is very significant, but may disappear in August.”

Grain prices have surged in recent weeks, with corn hitting a record high last month, as weather problems in the U.S. and the most severe European drought in decades sparked fears of poor crops from the world’s top exporters.

Markets are jittery after a succession of natural disasters in 2010 sapped output and left users eating into stock levels. Corn inventories in particular are now near historically-low levels and forecasters fear even a record world crop wouldn’t be enough to replenish supplies.

Using a range of models based on historical supply responses, Robertson predicts corn output is most likely to rise by about 15 million metric tons in 2011-12 to 840 million tons, drawing stocks down to a mere 6.3 weeks of consumption.

“The global corn harvest may well fail to match demand, even if there is no severe drought in the EU, China or the U.S., suggesting stocks could fall further in 2011-2012,” he said.

In wheat, an average scenario would see output rise by 2.5 million tons to 650 million tons, leaving stocks flat and boosting prices by 10%. In a more negative scenario, output would fall and stocks would decline to 148 million tons, pushing up prices 30%.

Our Take:
What’s wrong with this picture is that firms poised to make the most profit from this news are the ones telling us grain prices will rise. Current business reporting describes how wealthy people these days are buying luxury items as if money were no object, while most consumers continue to scrimp and save.

There is an analogy to be drawn in the actions of institutional investors who are ready to lay out billions in commodity positions on this news of rising oil-ag-metal and other commodities. It is a self-fulfilling prophesy, or a way that wealthy investors/institutions are siphoning capital. This is distorting the price discovery process and making it difficult for the producers and consumers of grain to function. The analyst tips his hand, even giving the approximate schedule of the sell off. The Big investors will ride the prices up through midsummer and then exit the market before August, leaving others holding the bag. Those still holding onto commodities at that point–producers, consumers, and “assorted doctors and dentists,” (i.e. small investors who are not expert at timing their market moves) will be poorer. And in the process, it will cost everyone a little more to eat.

National Corn Growers Association has lodged a protest against Chicago Board of Trade’s request to raise the maximum daily price change from $0.30 cents up to $0.40 cents–a move clearly aimed at attracting more billions into commodities from institutional investors who can capitalize huge commodity positions the way a wealthy person buys Hermes and Jimmy Choo. Meanwhile that price volatility in corn and wheat will burn co-ops, livestock farmers, ethanol companies and individual farmers.

Is it really beyond the power of the Commodities Futures Trading Commission to wrangle this system into a more rational working order? Didn’t we learn anything in 2008?

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