Commodity Prices

If you take the long look at the history of hog prices you see two significant shifts since 1950.  These are both upward movements to new equilibrium levels and they happened beginning in about 1971 and 1999 (or 2003 if you see it that way).  Both were the result of rapidly increasing (new) demand for agricultural commodities and were more or less unrelated to the economic movements of the general economy at the time.  The first move in ag prices was the largest in percentage terms (but we are not completely finished with the second movement which began 6-8 years ago).

     History is about ready to repeat itself in a number of ways.  We are seeing the basic feed grains rise on a global basis in such a way that the global poor (which I have written about in previous blogs) are having serious problems gaining access to the minimal food needs that sustain them.

     Stories are beginning to populate the news about Egyptian bread riots, rice riots in the far east and india and countries pulling out of the global market in agriculture to preserve what they produce locally for local populations.  Exports are being banned so that the inflated global prices don't suck out all the local supplies leaving domestic consumers with a huge and unacceptable increase in food costs.

     There are more bubbles floating around the earth today than I have noticed in my entire career.  Bubbles begin with legitimate economic opportunity but end up crowding out legitmate functions and market signals, resulting in all sorts of distortions and misallocations of resources.  They start harmlessly enough where opportunity exists, for where opportunity exists, investment is attracted to capture a return.

     A bubble happens when capital overpopulates an opportunity and drives its trading value higher than its fundamental economic value.  Since all deviations from reality are at some point rationalized, we can watch at some distance, the natural cycle of a bubble from formation to bursting in a dozen or more on-going markets but some of them we are caught up in more directly.

SwineCast 0286 Show Notes:

• "We estimate losses of $27 per head on average for 2008 for farrow-to-finish operations and those taking the market risk" - Chris Hurt
• Ron Plain looks at feed price support elements
• Belstra Milling's Jon Hoek explains why his organization bends over backwards to engage the local citizenry
• Dr Dennis DiPietre stops by to look at impact of outside influencers on our markets... today we discuss stagflation and the importance of world markets
• PCVAD update with Dr Lisa Tokach speaking at Pigski in Colorado

     The very word commodity is something like a slur.  If you're "just a commodity" it means you have nothing special to offer, you are average, common, and undistinguished.  Merrriam-Webster in the dictionary says a commodity is a "mass produced, unspecialized product".

     No one wants to be in the commodity business because it is specialization which brings distinction, branding and the possibility of a price bonus above the normal returns.  No one wants to be in the commodity business until a worldwide boom takes place and then it is just the place to be because commodities are the fuel of growth in the global economy.