Is the fuse of inflation close to being lit?

John Cripe is director of MID-CO Commodities.

Posted on: 3/18/2011 11:55:00 AM
A few years ago, we started giving presentations on the top 10 reasons to go long agriculture. Granted, they were not as funny as David Letterman’s, but we still thought it was interesting.

The reasons were, from a world prospective: population growth, income growth, land and water constraints, climate change, renewable fuels, the concentration of agriculture exports, land valuation, inventories, diversification, and foreign government stockpiling.

Take time to look up the YouTube video“Hans Rosling’s 200 Countries, 200 years.” It gives a very concise and vivid picture of the kind of demand agriculture is going to enjoy in the coming years.

The grain markets have made new highs and the bull market looks very much alive. However, the political fire started in Egypt recently has really spread.

Libya, Syria, Algeria, Sudan, Bahrain, Yemen, Jordan, and Saudi Arabia all now have civil unrest and the list is growing. Even China recently moved extra troops to the capital to deal with protests.

Like most fires, this can be good and bad, depending on how wild they get and who is in control. Right now, the U.S. has just been watching. But from a strictly economic view, if the fire would happen to reach the fuse of inflation, we might find out what the big bang theory really means.

Traditionally, inflation has thought to be a reason to buy commodities, and corn, beans, and wheat have certainly benefited by that kind of thinking. The danger here is that if this political fire burns wild and hot, it could send crude oil significantly higher.
 
History tells us in every year that crude oil has rallied, 80 percent-plus a recession or depression followed. The exception was 1987, and that year we still had a hard stock market sell-off in the fall.

We have to be careful what we wish for and stay informed on these world events, because the real long-term foundation of the agriculture commodity rally is demand.

If hyper-inflation goes too far and wrecks the world economy, we will have to start all over again, and that won’t be pretty. They say that there is no cure for high prices like high prices, and we really don’t want the cure for what we have enjoyed so far.

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John Cripe is director of MID-CO Commodities. His e-mail address is jcripe@mid-co.com.