Commodity Supply "Scares"

This week a new fallacy showed up in the commodities markets.  Having taken their profits by creating a wheat supply shortage "scare" from thin air, hedge funds and brokerages houses decided to jump to coffee, driving the futures price to near a 13-year high.  Somehow they have convinced the folks at Marketwatch and a number of other mainstream publications that the "perception" of a supply problem is the exact same thing as an actual supply problem.  Actually, in principle their logic is good, since we're talking about the futures price, which can only be estimated and therefore perceptions are reasonably taken into account.  The problem is that futures prices for two, three, or even six months down the road are not going up.

This is a transparent policy of pumping commodities for short term gain in a flight to safety.  If there was real fear of an actual worldwide commodity shortage, which some have predicted will cause food riots, wouldn't savvy investors like those who run hedge funds have long positions in March wheat contracts, for example?  I guess we'll never know, because today they took their coffee profits, a week or so after taking their wheat profits, as noted in a previous post.

Meanwhile, some brilliant analysis over at Marketwatch suggests that the recent wheat supply scare-that-wasn't should cause thinking folks to realize "just how fragile the global grain market really is."  This article is a true classic and you should take the time to read all of it.  One of the main reasons cited for "fragility" in the global grain markets: weather.  Of course, weather is always in play in pricing commodities futures, and it was cited as one of the main reasons for the run-up in coffee futures.  But here they are grasping at straws.

After writing last week that the hedge funds drove up the futures price based on nothing but their need for a safe haven, Marketwatch has trotted out a straw man.  Even though there wasn't a supply problem, the futures price rose, and there was "fear"... and so that means the market is fragile... so next time there is "fear", or weather "issues"... the price might rise again... because the market it fragile.  So much for supply and demand.  This is  fantasyland.  Feel free to play, but only if somebody gives you free tokens.

Here's the bottom line.  There is no wheat shortage.  The very same article that rationalizes a market response to pretend supply shortages notes that the USDA claims U.S. ending stocks are "three times larger than a few years ago."  The U.S. has more than enough wheat to cover what was not that big of a shortage caused by the Russian drought.

You will be paying higher prices for coffee very soon.  How will it feel when you see an article breathlessly reporting that Brazil's harvest was just dandy, despite all the "fear"?