However, during the past three months, there has been a considerable correction with prices touching a low of $31.01 in September.
As visible on the daily chart, price action since June has been contained within a large descending wedge pattern. Although this type of pattern often precedes the emergence of an upward trend, we believe that a period of consolidation and base building is required before the fund turns decisively higher. In the weeks ahead, we anticipate consolidation between resistance in the region of $35 and support around $31.
Adding further fuel to the fire, the US has a desire to reduce its dependence on oil whilst stepping up the use of biofuels. So as the need to feed the burgeoning human population puts strain on supply, the search for alternative energy is exacerbating the situation.
We are far from convinced that ethanol is the answer to soaring energy costs but as the price of oil remains high, the pursuit alternative sources of energy continues at pace. Doubts have arisen about ethanol's ability to lower net CO2 emissions (processing is energy intensive), and the diversion of crops to biofuels has contributed significantly to higher food prices.
The question of whether biofuels can be produced in a manner that does not send food prices shooting up, and brings an environmental benefit, is crucial to the future of the entire nascent biofuels industry.
For the time being, the alternative energy industry is playing its part. But there are additional factors.
Global water shortages are adding to the problem. Food production is highly water intensive. And according to the UN, agriculture is the number one consumer of freshwater. And looking ahead as the price of water is propelled skyward, we believe food prices will inevitably surge forward.
Scarcity is also a major issue for farmland. The majority of arable land is already under cultivation and with more and more land being used to produce corn for fuel less space is available for food production. And as the level of housing and business development increase, it is farmlands that are making way.
Furthermore, subsidies in countries where production is uneconomic will eventually and reluctantly fall as government spending is diverted away from agriculture. Indeed, right now in America it is not difficult to see that the government has other serious cash calls on its resources.
All factors considered high food prices are set to get even higher. Indeed, the refined appetite emanating from the East ensures that the effects of lagging global supply are set to have an alarming effect on food prices over the long term.
Returning once again to the charts. As we said at the start, the DBA Fund is designed to track the Deutsche Bank Liquid Commodity Index of which a long-term weekly chart is included above.
In just six months, between August 2007 and February 2008, this index rallied more than 75 percent. Following such rapid gains, a corrective retreat should not come as a surprise. While we cannot rule out a modestly deeper retreat in the near-term, we continue to believe that the broader outlook remains positive with a revival of upward momentum anticipated in due course.
As such, DBA will remain firmly held within the Fat Prophets Portfolio.
