History suggests that soybean price rally is not built on stable foundations

Since the start of March soybean prices have rallied by 25% on poor weather in Argentina, putting more than 3 million tonnes of soybeans at risk. Heavy rainfall have damaged the crop while also making it more difficult to harvest. Argentina is the third largest producer of soybeans after China and the US.

However, history suggests that even with a disruption to supply the prospect for further gains are limited.

A cursory look at the relationship between the three main global agricultural crops (wheat, corn and soybeans) suggests that the price of wheat, and to a lesser extent corn is the main driver of substitution affects between crops.

read more

The commodity rebound is cyclical, not structural

This website has published a number of articles looking at how oil, copper and commodity prices in general have performed at different stages of the market cycle. The risk after the rebound in commodity prices that we’ve seen since the start of the year is that the expectations of producers, manufacturers and we as consumers changes too soon, and we adjust our behaviour to something that may only be a transitory phenemenon – a so called ‘dead cat bounce’.

This is important. It could mean that the producers put off the day of reckoning for another day, not wanting to provide a free pass to others but also aware that something has to give. Equally, the rebound in many commodity markets may encourage new investments in production in downstream activities to be made on the basis that prices are likely to continue to rise from current levels. It also has implications for someone investing in miners and oil producers for the long term, perhaps as a part of a pension.

read more

Jeremy Grantham – An Admission of a Past Mistake on Resources

Jeremy Grantham, chief investment strategist at GMO and one of the biggest proponents of the super-cycle theory of ever rising prices has long warned that natural resources were running out and that the price of everything from minerals, energy and food would remain high. He now admits that he was wrong (click here for client note).

Grantham, best know for spotting bubbles in equity markets recognises that they are hard to spot

Giant bubbles are easy to spot statistically but hard to call from a career risk perspective. It is easy to be early, and being early may lose you your job, your clients, and your credibility. The fear is always, “Are these new high prices permanent? Is it a paradigm shift?” Every major bull event is called a paradigm shift but they almost never exist. Almost never. But not never, ever

read more