Inflation and Commodities

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In case I wasn’t clear enough in the past, I want to reiterate that inflation is alive and on a roll not only in the US but on a worldwide scale. The currency devaluation/inflation situation we’ve seen in the US Dollar vs. European, Canadian and Aussie in the last 3 years has only contributed to exacerbate price inflation of Petroleum products and foods, the two most widely consumed commodities. It doesn’t take the Fed to make me realize that if the price of a gallon of milk went from $2.00 to $4.00 (ask any mother) in the last 4 years, I’m faced with inflation.

 

World wars (and local too) have, are and will be waged for as long as man needs the three basics of life: food, shelter and security. Today, energy is the commodity that is most in demand (besides foodstuffs of course).

With the emergence of the Asian tigers (China and India) as economic forces to be reckoned with, the West is in an economic battle to control commodities. China’s expansion and heavy cash position (just moved in 3^rd place, displacing Japan to 4^th place) puts it in a domineering position over the rest of the world. No debt and excess cash reserves make China a formidable competitor on world markets. As a matter of fact, the Chinese are buying copper mines in South America, striking deals with African nations (who have been totally ignored by the West), importing technology and buying brain power; all this while exporting low cost goods and creating millions of jobs in the process which in turn contribute to higher tax revenue for the Chinese government and more spending capital for the workforce.

 

Another factor contributing to inflated demand for commodities is the population explosion we’ve seen over the last 50 years. According to the US Census Bureau, 1950 world population stood at 2.556 billion people; 2007 estimates place world population at 6.602 billion, an increase of 158%. Estimates for 2050 place world population at 9.401 billion people… that must be fed, energized, transported, housed, etc…

Going forward, demand pressures for staples will only increase.

 

The one question that seems to come up regularly is “How long can this bull market in commodities last and what will happen when it reverses?”

 

First of all, I believe commodity prices will continue to rise simply due to greater demand for the reasons cited above. As to what will happen when the trend reverses, my answer is that we’ll just have to position ourselves from the short side of the markets.

 

Volatility is becoming a constant in commodities and I do not expect that trend to change; my advice is to incorporate a volatility filter in your trading to protect your investments as well s to take advantage of the swings to come.

 

The sub-prime mess will also blow over as those home buyers who were over-extended and living above their means are given a dose of reality. I expect real estate markets to resume their climb (albeit not quite as meteoric as in the past) again due to worldwide demand from a rapidly expanding world population. “They don’t make land any more” is a an adage to keep in mind in this case.

 

For this week’s trade, I’d like to focus on a market that is getting somewhat overlooked lately. Coffee is a commodity that we can live without but whose popularity is growing thanks to the all the coffee houses springing up at every street corner around the world. Of all places, China traditionally a tea drinking nation is developing a taste for coffee. I don’t expect demand to grow overnight due to China, but let’s keep that factoid in mind. Production of coffee has become a science particularly in Brazil and Vietnam where both quality and quantity have been fairly constant. The coffee cartels – there are 5 international trading companies controlling 40% of worldwide coffee volume and 10 roasters controlling 65% of processed coffee – differentiate between coffee sold as a commodity and coffee sold to consumers.

Coffee as a commodity is affected by factors common to other foodstuffs such as weather, plantings, yield, carryover, etc… whereas coffee sold to consumers has the additional benefits of low cost/high margins yielding high profits for coffee houses.

 

Technicals on March 08 Coffee look flat at this time, however we look to enter this market on the long side as prices firm up and confirm that the uptrend is established.

 

STRATEGY:  Buy March 08 Coffee on a stop at 128.10 with an initial target of 136.40 followed by 141.80. Place stops at 123.60. If the first target is reached move stops to 132.20.

 

 

Best regards,

 

Chad Geraigiri

Senior Broker

1-800-771-6748 Ext 3

 

 

Past performance is not indicative of future results. Futures trading is not suitable for all investors. The risk associated with futures trading is substantial. Only risk capital should be used for this investment because you can potentially lose all or more of your original investment.