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Ron and Sue Mortensen: It's the Dollar

11/05/2010 @ 2:41pm

Today’s sharp move higher in commodity prices can be totally blamed on the dollar and the state of the US economy.  Although a sharply lower dollar can often provoke an upside spike in prices, why was today’s move so extreme?

 

The Fed’s announcement yesterday of a substantial QE program has renewed fears of inflation, even hyper-inflation.  The market has gone from a desire for a little inflation (so our economic situation does not turn out like Japan’s “lost decade”) to worries that the Fed has created too much inflationary pressure in the future.  

 

And, right or wrong, the best way to protect oneself against the ravages of inflation is to buy commodities.  

 

In contrast, the fundamental demand story for corn, wheat and soybeans has been fairly quiet this week.  Egypt tendered for wheat and did not buy any US product.  There has been only one large export sales announcement to China in the past several days.  Export sales for beans were large this morning, but not the 2 million metric tons like the past two weeks.  Plus soy oil sales were negative.  Corn sales were nothing special.

 

There are pre-report estimates out and the theme is slightly lower corn yields and slightly higher bean yields.  Again, this seems like old news.  

 

So it comes back to the dollar.  If the dollar is weak, why hold dollars?  Why not hold an inflation hedge (commodities)?  And what corn and soybean prices are necessary to change behavior?  

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