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Hoarding like the 1970's

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

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.

The farmer ability to hold grains should also be improving, as cash flow
needs might not be as great with higher prices for the past 15 months.
Sales made the past 15 months generated more cash with higher prices, so
farmers needs to sell for cash flow reasons or 'banker sales' might be
waning. Hoarding is a stronger possibility, and one that could push prices
up even higher in the near term.

Of course, any time farmers hold increasing amounts of grain, stocks build
and rising prices further trim demand. When funds detect this process
resulting in larger farmer owned stocks over a few months, it might be time
for index/speculative funds to start unloading their long positions which
they've held for some time. So while hoarding initially will lead to even
higher prices than fundamentals might suggest, later on the swing to selling
once prices start to deteriorate might lead to a more rapid price drop than
fundamentals dictate as well. As always, timing is everything. If initial
stages of 'hoarding' are present, it might take 3-12 months for this whole
process to play out.

The impact of the DOW on the timing of this process is important. If the
DOW continues to stumble and money continues to flow into commodities from
stocks, the rally might last longer. So now not only do you need to keep
your eyes on index fund positions and the grain markets, but you also might
want to watch the DOW Jones industrials index and keep your eye on farmer
sales as well. These could provide some additional clues as to the timing
of sales the next 12 months.

The information contained, while not guaranteed as to accuracy or
completeness, has been obtained from sources we believe to be
reliable. The opinions and recommendations contained are based on
our judgment and do not guarantee that profits will be achieved
or that losses will not be incurred. Recommendations should not
be construed as an offer to buy or sell commodities. There is
substantial risk of loss in trading futures and options on

If you have questions about this column, call Progressive Ag at 1-800-450-1404,
or email ray at

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.

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