Back to square one

The U.S. dollar index now has a year-to-date loss of 7.8%. The latest catalyst was what Fed chairman, Ben Bernanke had to say in his address to the Economic Club of New York. According to the Marriott hotel in New York some 1900 patrons stopped by for lunch to hear what Mr. Bernanke had to say. He told his audience that asset prices were not out of whack with reality following the economic recovery.

Many investors took this as a green light to extend the rally enjoyed by stock prices since March. The S&P 500 index is now up by 63% since then. Meanwhile the Chairman made a controversial reference to the dollar, which some immediately took to mean that the Fed might intervene to prop it up. However, dealers quickly realized this was not imminent or even likely and quickly sent the dollar back down.

That allowed commodity prices to rally sharply with gold once again reaching a record high adding 2% to close at $1,140 per ounce. Silver futures fared even better adding 2.7% to stand at $17.87. The price of soybeans jumped 1.8% as an industry report showed a really strong start to the crushing and extracting process proving extremely healthy underlying demand. Meanwhile rains in the Midwest over the weekend increases the potential to leave corn crops stranded in the field. Only around one third of corn has been harvested this season, which is well below the five year average of 82% typical of this time of year.

The rise in grains on Monday was more to do with fundamental supply and demand imbalances rather than as a pure anti-dollar play – admittedly bullish if you’re a grain optimist. But what of the future? According to an official at the United Nation’s Food & Agriculture Organization (FAO) we could be in store for a fresh surge in staple food prices because the world simply isn’t doing enough to avert the next crisis.

In other words, the structural problems partially responsible for a price spike in 2008 have not gone away. While some of the responsibility lies with an ailing dollar at that time, a global economic recovery quite literally sows the seeds for a future price surge. It would seem as though we’ve come round in a full crop circle and are back at square one. Lack of investment, surging population growth in under-developed and emerging Asian markets have combined with a diversion of food commodities into biofuels to create a problem revisited.

Meanwhile some commodity prices are still trading at lofty levels despite farming responses to expand output. Sugar, cocoa and tea prices are at the highest in 30 years. Expanding output through increased use of genetically modified seeds is one plausible solution that would boost yields and productivity.

A weaker dollar isn’t part of the solution for stabilizing basic food prices, but it does look like it might be another factor working against the problem.

The Supreme Council of the Secret Order of Jurojin

Tyche Research

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