Barron’s Fears Commodity Bubble

A rush of professional and institutional investors followed by investors betting on signs of an economic rebound has pushed the prices of crops to astronomical levels. As seen with the housing market in 2007 and then again with oil prices in 2008, lack of attention to fundamentals and excessive speculation can lead to abrupt sell-offs.

At a time when U.S farmers are completing much of their harvests and Brazil and Argentina have just begun planting, one would expect prices to decline. However, Corn prices have risen 17% in 1 year, whereas, Wheat and Soybeans have risen 13% and 3% respectively in just one month. Even with unusually strong farm-harvest adding to downward demand side pressures on harvest, flawed fundamentals and irrational fund activity has created the specter of yet another commodity bubble.

According to Barron’s a weak dollar which would subsequently lead to an inflow of dollars into the economy will create an inflation bubble. The market is looking so far forward it is reacting to inflation news and expectations that supply and demand fundamentals will support prices sometime in the future. Essentially, crop prices are being dictated by Fund managers and not the principles of Demand-Supply any longer.

Barron’s presses upon the point that even though a weak dollar activity may be reason enough for a slight price hike, a bumper harvest and final stages of harvesting in the U.S imply that prices have outrun fundamentals. The fundamentals suggest a bearish call on agricultural commodities and the time seems ripe to prick the agricultural commodities bubble. However since hedge-funds and hot money players are the buyers in this scenario, there is a risk that even in the event that the bubble has reached its peak, there is no point in maintaining a short position, as there wouldn’t be much of a selloff.

Fundamentally, higher prices will lead to farmers planting more and more crops, and the day the bubble bursts, the prices will fall lower than their fundamental levels due to overproduction. To prick this bubble Barron’s suggests a bearish call on agricultural commodities.