Wednesday Commodities Round-Up; Agricultural

The last few times I have posted this chart, I have speculated it was forming a double top. While this is still looking like a strong possibility, there is also the possibility that prices are consolidating in a rectangular/triangle top. We won't know until we see prices break up or down. However, the good news from an inflation perspective is that prices have at least stopped their upward move and are consolidating.



On the daily chart notice the following:

-- Prices are below all the moving averages

-- The 10 day SMA has crossed below the 50 day SMA

-- The 20 day SMA is about to cross over the 50 day SMA

-- The 10 and 20 day SMA are both heading lower.

The SMA picture is bearish, but for this chart to turn completely bearish, we need to see a strong break below the low point between the double tops -- roughly 400 or so.

Food Cost Increases Leading To Increased Price Controls

From the WSJ:

Last month, China said it would require producers of pork, eggs and other farm goods to seek government permission before raising prices. When producers do seek permission, it is denied, market participants say. Thailand is taking similar steps on instant noodles and cooking oil, while Russia is trying to cap prices on certain types of bread, eggs and milk.

Elsewhere, Mexico is trying to control the price of tortillas, and Venezuela is capping prices on staples including milk and sugar. Malaysia is setting up a National Price Council to monitor food costs and is planning stockpiles of major foods, as well as a 24-hour hot line for consumers to vent about spiraling food costs.

These measures reflect the mounting pressure on developing economies as food costs rise sharply. Food-price inflation is running at an 11% annual rate in major developing countries, up from about 4.5% in 2006, according to Bank of America Corp. The price rises partly reflect increased demand from emerging markets and higher oil prices, which drive up the cost of growing and transporting food.

In Singapore, inflation accelerated to a 25-year high in December, partly because of food. In Mexico, Malaysia, Pakistan and Indonesia, food-price increases or shortages have triggered protests. Late last year, three Chinese shoppers were trampled to death in a supermarket scuffle over cooking oil. In poor Caribbean nations like Haiti, the situation is especially dire.

There is good and bad news to increased prosperity. The good news is everybody is making more money, which increases the standard of living. The bad news is increased standard's of living increases overall demand for food. Making that situation more difficult is the US' use of ethanol, which has really complicated the corn market -- and not for the better.

I have reprinted the following chart many times over the last year or so, and will continue to do so.



This is a chart of agricultural prices as represented by the Goldman Sachs commodity index. It shows a 133% increase over the last 3 years. In addition, the chart is a clear bull market chart with higher highs and higher lows.

A look at the various components of this chart shows the exact same pattern:



Wheat had a huge price spike last year, nearly doubling in price. While the 950 area is offering strong resistance right now, a move through that area would indicate a continuation of the market's bull run.



Soy has been in a bull run since late 2006, with a clear pattern of higher highs and higher lows.



Corn is showing an strong rally as well, with prices doubling in the period of about a year and a half.

At some point, these price increases have to bleed into prices at the retail level. While governments are attempting to thwart the pain at the retail level, price controls will eventually push producers out of the market as their profits go away -- or encourage them to produce inefficiently, which is the last thing they need right now. The only way to deal with this problem is to increase supply in a big way.

What Inflation?

From Bloomberg:

The UBS Bloomberg Constant Maturity Commodity Index of 26 commodities climbed 22 percent last year, its sixth straight annual increase, powered by advances in wheat and soybeans. It was up 9.29 at 1,314.907 at 1:25 p.m. London time. The Reuters/Jefferies CRB Index of 19 raw materials gained as much as 1.11 to a record 367.97.

And consider these points:

Gold and platinum rose to records for a second day and crude oil traded near $100 a barrel as the dollar's slump enhanced the appeal of raw materials as an inflation hedge.

Agricultural commodities also rallied as wheat had its biggest two-day increase in four months, palm oil reached a record, soybeans traded near a 34-year high and corn neared an 11-year peak. Metals including gold, which rose beyond $850 an ounce for the first time yesterday, have more to gain, Evy Hambro, managing director of BlackRock Investment Management Ltd., said today.

Consider the following charts:



Corn has broken through key resistance areas twice in the last two years. In addition, it has broken out of a trading range that lasted for 8 years. An old adage among traders is the longer the base, the stronger the break-out.



Like corn wheat has also broken out of a long base. It spent the last few months of 2007 consolidating its gains.



Platinum is in the middle of a 6 year rally. Notice the strength of this rally -- it continues to push higher and higher in a disciplined manner.



Gold is also pushing to new highs. Notice it has broken through hey resistance levels twice in the last few months.



soy beans have moved into record territory as well, again breaking through key resistance over the last month.

Notice an important common feature to all of these charts: they are all "breaking through key resistance areas. That's an incredibly important fact; it indicates the bulls are running across a variety of commodity prices.

Agricultural Prices Increasing

I've talked about agricultural prices a lot, largely in the context of inflation. The chart below explains why these prices are really important right now.



For the last three years, agricultural prices have been increasing. The chart above shows an incredibly strong chart that is a great example of a bullish chart. Prices formed a strong base in 2005. They rallied from the base and then consolidated in a bullish pennant formation in 2006. After selling off a bit, prices again rallied into 2007 where they again consolidated in two patterns -- a broadening pattern and then a triangle pattern. Prices have risen twice since then. In short, this chart says prices are increasing and will be for the foreseeable future.

From Bloomberg:

Wheat futures gained in Chicago as rising food costs signaled increased demand for the grain at a time of shrinking global stockpiles. Corn and soybeans declined as recent advances may have been overdone.

U.S. consumer prices rose the most in two years last month, while inflation surged 6.9 percent in China and 3.1 percent in Europe. Inflation is accelerating as oil and other energy prices reached records in November, spurring investors to buy commodities as a store of value.

``The global backdrop of inflationary pressure is supportive for agricultural products as we head into 2008,'' Nie Ben, manager at Liaoning Cifco Futures Co., said by phone from Dalian in northeastern China today.

.....

Corn reached a nine-month high yesterday at $4.4325 a bushel, while soybeans extended a rally to the highest since 1973 on speculation that U.S. demand for fuel made from grain and oilseeds will surge. The Senate passed a bill Dec. 13 that may boost use of alternative fuels such as ethanol and biodiesel.

Let's look at some of the individual charts:



Except for a price spike in early 2004, corn traded in a 20% range for 8 years. An old trading saying is the longer the base, the stronger the rally. If that holds, we're in for one hell of a bull run.



On corn's weekly chart, note it has been in a bull market pennant pattern for most of this year. This is a classic consolidation pattern. Also note that prices are making a move to break out of this pattern and move higher.



The monthly soy chart shows prices have been here before.



But, for the last two years, soy beans have also rallied. This is another example of a bullish chart. Note the continual pattern of higher highs and higher lows. While soy beans have been here before as the monthly chart demonstrates, this week chart shows there is every reason for prices to continue higher.



Like corn, wheat was in a pretty tight range for 8 years.



But since then, prices have clearly rallied. They broke out of their base in late 2006. From the end of 2006 through the first quarter of 2007 prices consolidated. Then they broke out. The only drawback to this chart's bullish angle is the possible formation of a double top this year.

Short version: agricultural prices are in a strong position to continue moving higher.