Commodity prices are heading up

Egypt is experiencing mass demonstrations with protestors calling for a regime change and improved employment opportunities, i.e. a better quality of life. The results of this development within the most populous Arab country are as yet unknown, but the turmoil has concerned Egypt’s neighbors and trickled over into commodity markets.

What is to blame – Hosni Mubarak’s authoritarian regime or some other factor? Since I am a “Financial Advisor” I will stick with what I know. The dollar is the most important currency in the world and the Federal Reserve controls the value of the dollar by setting interest rates and controlling money supply. When the Fed prints too many dollars, price inflation results and often shows up in commodity prices first. When loose monetary policy lifts energy commodities, oil exporters typically benefit. Egypt is an oil producer and refiner, so rising energy prices should be slightly positive for their economy.

Likewise, when loose monetary policy lifts food commodities, food growers and exporters typically benefit. Egypt is a food importer; according to the Egyptian Agricultural Minister, the country imports 40% of its food. So, rising food prices are negative for the nation’s economy.

In the second-half of 2010, the Goldman Sachs Agricultural Index climbed 66%, the steepest increase for any 6-month period since 1974. Recently, there have been several instances where third world governments lifted subsidies on food & fuel and then, because of mass protests and discontent they, at least partially, re-instated the subsidies. In other words, the impact of a declining dollar and rising food prices has been detrimental to the average standard of living in Egypt and, in many other parts of the third world, where you can add rising energy costs to the mix.

Not helping this global situation is the fact that by 2010 the percentage of US corn production devoted to the production of ethanol was 39.4%, or nearly five billion bushels out of total U.S. production of 12.45 billion bushels, add to that the droughts last summer in Russia and Australia and then the floods and typhoon - again in Australia.

Portfolios under my advisement have maintained exposure to metal commodities for several months and recently (pre-Egypt) added broad agricultural commodity exposure. Agricultural commodities stand to benefit from a plethora of dollars, rising global demand and misguided policies.

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