Despite the recent bout of dollar strength, the bailouts of Fannie and Freddie followed by AIG and now a massive $700 billion rescue package present a more accurate harbinger of things to come. The Fed may have resisted a rate cut this month in a bid to control inflation, but the potential inflationary impacts of recent bailouts should not be underestimated. And the resulting weaker dollar will in our opinion only serve as rocket fuel for commodities prices.
The flood of US dollars circulating around the world economy is only matched by floods of a literal kind which seem to batter the US on a regular basis. If it is not Gustav, it is Ike.
Whether or not global warming is to blame the fact is that the planet's climate is becoming increasingly volatile and acute. Droughts, severe winds and floods are hitting the headlines on a more frequent basis. These events, more so than for other goods and services, can have a significant influence on agricultural supply.
Indeed, the supply crippling hurricanes which are erasing the Midwest grain crops are precisely the kind of natural disaster that, under many climate forecasts, will become routine a few decades from now.
Hurricane Ike for example made its effects felt far beyond the Gulf States. It dragged its winds and rains up the Mississippi River Valley and across the eastern Corn Belt’, flooding or flattening crops.
Supply is struggling, but that is just one side of the equation.
Arguably the main force behind the soft commodities juggernaut is the growth of the world population. It is anticipated there will be 9 billion mouths to feed on the globe by 2050. And no matter the economic climate, the population has to eat.
Not only is population soaring, but many of the newcomers are wealthy enough to eat meat. Given that it takes an average of eight pounds of grain to make a pound of meat, the dietary requirements of the world’s burgeoning middle class is resource intensive.
While an economic malaise presides over the western world, over in the East it is business as usual. The Chinese and India freight trains continue to race ahead as economic growth is supported by both global AND domestic demand.
In China, (where annual GDP growth could fall as low’ as 9 percent) is it estimated that 500 to 600 million people are set to relocate into cities over the next 10 years. China’s urbanization represents the single biggest mass migration ever and is a sign of the burgeoning prosperity within the country.
As a result, current levels of demand for refined food are soaring while production levels are struggling to keep up.
As the charts illustrate investing in commodities is not for the feint hearted. Riding a bull is never smooth and there will be healthy short term corrections along the way. Our recommendation of DBA however is from a long term perspective and based on strong fundamentals.
From a technical perspective, following our last review in June, the Fund extended a rally to a high of $42.65, falling just short of the all-time high of February at $43.50.
