From the Wall Street Journal:
Companies contending with rising commodity prices are stockpiling rubber tires, cotton clothing and other goods, a maneuver that is aimed at insulating them from inflation but also could contribute to it.HT: The Reformed Broker
Spice-maker McCormick & Co. stocked up on some ingredients and Monro Muffler Brake Inc. bought extra tires and motor oil, assuming prices of those goods will keep rising. Anton Sport, a small athletic-wear wholesaler in Tempe, Ariz., amped up its fabric purchases to avoid higher prices.
These pre-emptive purchases are a fraction of overall business activity, but the trend is being watched by economists and business executives. The stockpiling comes at a pivotal moment for the global economy, as central bankers scramble to judge the impact of raw-materials price increases and figure out whether or when to raise interest rates.
Purchases made more because of perceived inflationary pressures than a response to demand are important because they signal that inflation expectations are climbing. Economists often focus on inflation expectations, because they can spur people to speed up their purchases, in turn driving prices higher.
"The price increase then becomes a self-fulfilling prophecy," said Zach Pandl, an economist at Nomura Securities. Once the cycle ends, prices can collapse, he said.
The hardest part is pinpointing when this cycle begins and figuring out when to step in to quell it.
John Anton, Anton Sport's founder, saw the price of cotton shooting up, and decided to act. Last month, when his T-shirt suppliers warned about the fourth price rise in six months, he borrowed $300,000 through his home-equity line of credit and bought more than a year's supply. Mr. Anton typically has about 30 boxes of shirts on hand at one time, but now has more than 2,500.
"It just kind of clicked that I can borrow at 2.45%, and if cotton is going to go up between 10% and 12%, why wouldn't I do this?" Mr. Anton said. Cotton prices rose 92% last year, and are up 22% this year....MUCH MORE
And From Points and Figures:
Commodities are on fire. Back when the stimulus was enacted, most old traders that I knew said commodities would scream higher. They were survivors of the markets of the 1970′s. Commodities went on a tear then. Heck, even Hillary Clinton made 150k trading cattle!HT: Abnormal Returns
But in 2009, most of the big price action was in metals. Gold and silver took off. The story in 2010, and so far in 2011 has been in the softs, grains and meats. The core commodities needed for survival.
There are two curves to every economic coin, supply and demand. When analyzing commodity markets, it’s really easy to get a handle on the supply side. Demand is not so clear. That’s really what every one that trades the market is trying to get a handle on.
For supply, there are government reports of production, or potential production, weather forecasts, reports of inventories, and a myriad of other things to lean on. Plus, if you can develop a network of people in the business, grain elevator operators, feedlot operators, you can get a good handle on what the producer is thinking and tangible anecdotes on what it happening. Supply is transparent.
Demand is much more obscure. In meat markets, it’s helpful sometimes to skim grocery store ads. Try and find out from chain store managers what’s moving and what isn’t. Trade data is helpful. When Russia decides to play games with the US over chicken, wheat and pork, it affects the demand because exports are a huge part of the US agriculture business.
That brings us to today. We have had huge run ups in prices of many commodities because countries are hoarding them. Fear of protests by their citizens has caused them to overbuy in the international marketplace. Meanwhile, the things that they desire; wheat, sugar, coffee, cocoa, cotton each had terrible crops last year due to weather. In cotton, the only country that had a crop was the US. What will happen next?
Economic incentives will drive farmers all over the world to the field to expand production. Already farm equipment operators like John Deere ($JD) have seen a benefit. Farmer’s are modernizing operations to try and increase production. Producers of fertilizer should benefit too. Potash, a fertilizer has seen a large increase in price this year. Seed companies like Monsanto ($MON) and Syngenta ($SYT) ought to see good results as farmers plow up more land. This should put some downward pressure on prices.
But, inventories of basic foodstuffs like wheat and rice are low. Raw cotton inventories are almost non-existent. A good crop year will just refill the larder. We actually need two good crop years in a row to really put downward pressure on prices....MORE