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Hoarding like the 1970's

Agriculture.com Staff 11/28/2007 @ 9:47am

The Dow Jones index has dropped recently from making new highs mid-October at over 14,000 to under 13,000 this week, a development that has US policymakers concerned about a recession in the US.

Pro Ag has been talking about how the commodity markets looked like the situation in the early 70's so far. Perplexing, though, was the fact the DOW didn't look anything like it at this point. What does the DOW have to do with commodity markets, you might ask?

In the 70's, the DOW was making new highs in about 1972, and then suffered a setback during the rest of the 70's as commodity values were soaring. Inflation was increasing at accelerating rates, the dollar weak, and the stock market soft. This helped to push the flow of money into commodities (and real estate) and out of stocks during this period. It wasn't consistent that commodities could be running to new highs at the same time that the DOW was also running to new highs in 2007 if we were in a 1970's type scenario.

Something was not right in this mix, but perhaps the last few weeks are indicating the DOW is turning another direction. This adds to the credibility of a 1970's type commodity boom.

This could add to the bullishness of commodities as an extended setback in the DOW would lead to more money flowing into commodities. If commodities are going to rally while the DOW is weak, investers might send even more money into the commodities market than they already have. This could build even more interest in commodities. Already the investors' 2007 Commodity returns have been outstanding at about 30% in all commodities (except livestock).

It's not often that stock investors even mention commodities as an investment, but recently that is happening with increasing frequency.

Farmers are starting to catch on to this investment strategy as well, (stealing from index funds playbook), especially in the US where the weak dollar is pushing prices up much faster than in other countries. US Farmers are finding their best investments over the past 15 months have also been commodities, as holding wheat, corn, soybeans, or many minor crops in bins has provided a better return than any CD or typical investment in the stock world (or even housing). Because this has been an extended period of steady price improvement (over 15 months), it's possible we could get some 'hoarding' of grain by producers.

I have read about this phenomenon in economic history type books, most of the time affiliated with second world countries with high inflation rates and weak currencies. It doesn't happen often in the US, with the 1970's as the most recent period in US history, where commodity inflation and a weak currency led to a great return from holding grain an extended period of time. In the past 30 years, though, the combination of interest and storage costs and deterioration in grain over time led to losses most of the time from long term storage. Most of the time, it was best to convert those grains into cash at some point in the marketing year. But for a period of a few years in the early 70's, owning cash grain in the bin was better than just about any other investment. For 2008, weak soybean basis and spreads suggesting storage returns are tough to ignore, for example.

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