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Connecting 'stagflation' with a commodity price boom

Agriculture.com Staff 01/16/2008 @ 7:00am

In today's USA Today, 'stagflation' was the buzzword discussed in the US financial circles, with the last real period of stagflation mentioned in the 1970's.

Mostly this period occurred in the mid-to-late 70's, after commodities had all hit their peaks in 1973 (soybeans) and 1974 (corn and wheat). Oil had also already made its run by the time 'stagflation' became a popular term.

In fact, this current commodity boom has played out eerily similar to the 1970's, with first a boom in oil prices followed by a boom in grains. This took a few years to play out, as by 1974 both energies and grains had seen most of their bullish run. Then gold and silver took center stage in the 70's, so one potential difference so far is that gold has already run to new all-time highs (about the same time as soybeans broke above their all time highs in early January).

However, both gold and silver were behind the grain/energy commodities in their 1970's bull run - so far not so during the 2007/08 run.

While this current boom period doesn't have to be exactly like the 1970's, there are some notes worth highlighting about the 1970's boom as compared to the late 2000's. First, the 1970's was a period where the US hit its peak oil production, and the worry was that we couldn't produce enough oil to meet demand, and the world as we knew it was expected to change because of the 'oil crisis'. But we turned to oil imports in the US to meet our expanding demand, and that has been the case until today.

Today, the 'peak oil' production for the world is supposed to have been hit, and now the world is supposed to find alternative energy sources to power what is a highly dependent oil/energy world. We are increasingly becoming addicted to cheap oil, with it feeding the industrial economies of the world.

Now we are turning our attention to alternative fuels, and it might be the job of the market to make these alternative energies more economical as well as to force people to change their living habits, lessening their use of energy worldwide. Price is a powerful force to make changes, and today that seems to be the charge of the marketplace. So oil went up first, making ethanol the boom stock of 2006-2007.

While oil was first on the list, second has been the grains, with increasing use of grains to produce energy making shortages of grains. This has put pressure on production so keep up with expanded demand, and now with increasing world demand for food (driven by rising Chinese and Indian incomes - one third of world population!), there is a crunch to make sure the world can produce enough to meet all these new sources of grain demand. So food prices are going higher, starting with corn in fall 2006, spreading to wheat and soybeans in 2007 and continuing into 2008.

Rather than the Russians coming in and supplying the shock to world markets like in the 70's, it's the index funds who are buying US grains in the late 2000's boom, currently owning 3 billion bushels of corn, 1.5 billion soybeans, and 1.4 billion wheat bushels (and still buying at $5 corn, $13 soybeans, and $10 wheat). They are the power behind this mammoth 17 month long bull market (and still going) instead of a foreign source (like Russia in the 70's).

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