Wednesday, May 21, 2008

Cosmic coincidence...

Just this morning, two e-mails arrived within moments of each other. It was like wild karma, man.

First, this from Delta Farm Press by Elton Robinson quoting Jeffery Harris of the CFTC:
“Simply put, the economic data shows that overall commodity price levels, including agriculture commodity and energy futures prices, are being driven by powerful fundamental economic forces and the laws of supply and demand,” Harris said. “These fundamental economic factors include increased demand from emerging markets; decreased supply due to weather or geopolitical events; and a weakened dollar. “Together, these fundamental economic factors have formed a perfect storm that is causing significant upward pressure on futures prices across-the-board.” [More]
That point of view is proving to be a tough sell for cotton producers as Elton elaborates.

But here is the next e-mail from a reader who asks, "Is the party over?" This testimony from Michale Masters of Masters Capital Management LLC regarding his view that Harris is roughly completely wrong.
What we are experiencing is a demand shock coming from a new category of
participant in the commodities futures markets: Institutional Investors. Specifically, these are Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts
than any other market participant.


Chart Two shows this dynamic at work. As money pours into the markets, two things happen concurrently: the markets expand and prices rise. One particularly troubling aspect of Index Speculator demand is that it actually increases the more prices increase. This explains the accelerating rate at which commodity futures prices (and actual commodity prices) are increasing. Rising prices attract more Index Speculators, whose tendency is to increase their allocation as prices rise. So their profit-motivated demand for futures is the inverse of what you would expect from price-sensitive consumer behavior. [More]
Frankly, I haven't read through the whole thing thoroughly yet. (Too much fun mowing roads)

But I thought I would make it available and then add an update to this post this evening or so.

[Thanks, Tom]

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