Alan Brugler is the President of Brugler Marketing & Management, and the primary analyst and advisor.
Big Stories of 2010
Dec 30, 2010
There are a raft of year end stories in circulation, focused on the percentage gains for commodities like cotton during the year, and/or the likely asset allocation adjustments driven by those gains in 2011. While we are very willing to acknowledge that markets are mean reverting in the long term, prices tending to return to their average, the market can remain illogical for far longer than you can remain solvent. Things will change.
So what can change in 2011? Here are a few thoughts:
1) Inflation picks up. Commodity prices rise because the global economy is improving and creating more demand for a relatively finite supply of goods. It takes a couple years to ramp up beef production, and the precious and industrial metals are similar.
2) Interest rates rise. Loan demand typically picks up as the economy improves. Throw inflation on top of it and interest rates will tend to rise. Particularly in the long end. Fed easing via the QE2 program is a wildcard, but thus far hasn't had much effect in dropping rates.
3) The US dollar reverses and heads lower. The mammoth federal deficits and a negative balance of trade will tend to weigh on the dollar over time. For now, it is firmer because in the land of the blind the one eyed man is king.
4) Global soybean demand slows down. The huge expansion of Chinese crush demand was one of the major stories for 2010, as a recovery in their hog numbers and rising food prices in general fueled heavy crush activity. China grows only about 16 MMT of beans per year, and imported 54 MMT or so in 2010 to supplement them. However, those on fixed incomes can't keep up in an inflationary environment and that creates social problems. China is actively trying to slow down domestic demand and prices. Fixed prices on vegetable oils are squeezing crush margins, and there are reports of imported beans being dumped into the market at a loss because it is not economic to crush them. Most of the "tight" scenarios for global plantings in 2011 assume that Chinese import demand continues to grow. If it does not, beans could give up some needed acreage to other crops.
5) La Nina lingers. The La Nina weather pattern has hurt Australian wheat production, and is threatening yields in the recently planted Argentine corn and soybean crops. The pattern is expected to weaken by summer, but dryness in the southern US is typically extended into March or April in La Nina years. That could aggravate the current drought conditions. The risk is that the drought expands or migrates into the main Corn Belt growing areas during the summer.
6) Spec fund and index fund investments shift. As was the case in 2007 and 2008, rising commitments to the commodity markets are boosting prices as they swamp the commercial sellers. If they funds stay put, or add to positions, a return to 2008 type grain prices is a possibility. On the other hand, if equity markets become more attractive (they typically gain in the 3rd year of a presidential term) they may siphon money away from commodities and starve the markets. CFTC is also preparing to implement position limits, with unpredictable effects on prices.
There are other things that could effect the markets, and it is the one you don't see coming that can kill you. These are just a few of the themes we have been watching, and will continue to watch as the calendar turns to 2011.