I mentioned in my morning piece today that some of the pressure in the corn market was tied to news that Smithfield, the largest US pork producer, was sourcing corn from Brazil instead of domestically here in the US. That is big news as it indicates how tight current supplies are and how the rise in price is already beginning to do its job of rationing demand.
According to a consultant at Brazil's Safra & Mercado, reported by Dow JOnes which has been all over this story, corn at Brazilian ports is currently fetching $290/ton compared to US corn at the Gulf of Mexico which is closer to $345. It costs anywhere from $30 - $40 ton to ship the grain to the US.
There is no doubt that the meteoric rise in the grains this summer on account of the severe drought is going to impact all of us at the grocery store in the near future. My concern in all this is what might happen should the Fed foolishly choose to go forward with another round of QE. Keep in mind that the rise in the grains has been fundamentally driven. In other words, there are legitimate supply/demand fears pushing the price higher.
If the Fed does indeed begin another round of bond buying in order to prop up the US equity markets, a huge amount of hedge fund speculative money is going to flow directly into the commodity sector in a very crude fashion. Think of it as a shotgun instead of a sniper's rifle. They will blast everything in sight higher.
In the grains this will have the immediate effect of pushing prices even higher further exacerbating the impact of the drought. The problem will occur because the money flows can be so huge that even deep-pocketed commercial sellers will have difficulty standing in front of such a torrent of buying. I shudder to think what might happen if their computers drive the price of corn to $9.00!
Remember those food riots that began a while back in Algeria and the spread across parts of Northern Africa and the Middle East? Some, including myself, believe that those riots were the catalyst for what have now become rather euphemistically known as the Arab Spring. When food prices begin soaring, they impact the poor first and when a large enough segment of society becomes restless, it is always a safe bet that further instability soon follows. While Bernanke tried deflecting the entire blame for the surge in wheat prices back then on the weather, the truth, as we pointed out at the time, was that the entire commodity sector, including wheat and the rest of the grains, began moving higher at the exact same time as QE I commenced. QE2 just made matters even worse.
It is bad enough dealing with the devastation coming from a drought - it is entirely another matter dealing with the potential devastation coming from a bunch of meddlers in the economy.
These monetary masters and their utterly useless strategy of buying bonds are playing with fire.
"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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