COMMODITY INSIGHT GENERAL OUTLOOK Prepared by Commodity Insight
(January, 8, 2001) Without a doubt, the most important piece of news to hit the marketplace in quite a while was the Federal Reserves change in monetary policy. After pushing rates upward for two years in an effort to slow the economy and to fight inflation the Fed has suddenly and dramatically reversed course.
On Wednesday, of this week the Fed lowered rates by one-half point and the following day the dropped rates by another one-quarter point. There is near unanimous conviction that the Fed will continue to push rates lower in order to prevent the U.S. economy from sliding into a recession.
Over the short run the drop in rates may appear to be, "too little, too late" to help support the equity markets and the economy. After all, from a historic perspective it takes six months for lower rates to filter through the economy and show up in productivity, manufacturing and employment data and at some point in time, higher equity prices.
Those are well know facts about how lower rates impact the economy and the equity markets as a whole.
But what do lower interest rates historically mean for U.S. agricultural commodity prices? Historically, lower rates gives birth to bull markets. That too, is a fact.
One primary reason U.S. agricultural commodity prices have been in a pronounced bear trend for the past years is the strength of the Greenback. Higher rates usually spawns a higher U.S. Dollar. A strong dollar makes U.S. agricultural commodities too expensive for foreign buyers. And in late October, the Greenback was at its highest level in 18 years.
This week however, due to signs the economy is slowing and the Fed actually lowered rates the Greenback fell to its lowest level in six months. The Greenback has gone from an 18-year high to a six month low in the short space of two months. And if the Fed continues to ease rates it can be fully expected that the dollar has more to go on the downside. If so, U.S. agricultural commodity prices should improve.
When the Fed raises rates they are fighting inflation. When the Fed lowers rates they are saying loud and clear that they will now tolerate a bit more inflation than they have in the past. The Fed now wants to slay the "recession dragon" and is willing leave the "inflation dragon" alone.
The recent drop in the value of the U.S. Dollar due to a change in Fed monetary policy is only part of the story. Another part of the story is the rapid rise being seen for the Eurodollar. The Euro, after collapsing from June to October of 2000, has turned upward with a vengeance. This week, it ended at its highest level since last July and is nearly par with the U.S. Dollar.
That means the European Union as well as individual European nations have a currency that now enjoys great buying power. Europe for the first time can use a strong Euro to purchase such commodities as soybeans or soybean meal.
Why beans and meal you ask? The panic and fear brought about by "Mad Cow" disease caused a ban on the use of bone and meat meal for use in animal rations. Now, all of Europe is forced into using soybean meal and soybeans in livestock rations. And the stronger the Euro dollar, the more beans and meal can be purchased.
Are such purchases being seen and having an impact on U.S. soybean or soymeal prices? I would have to answer with an emphatic, yes! In the final few days of last year, soybean meal values in the U.S. rose to their highest levels since July, 1998. Meal prices were pushed to lofty levels by European demand.
Also, keep in mind that the higher the Eurodollar rises the greater the odds are that European wheat prices will be unattractive to foreign buyers. That simply means that U.S. wheat values become more competitive on the world marketplace.
The Fed is now willing to tolerate more inflation than before. They proved that loud and clear this week when the lowered rates for the first time in two years. That change in policy is bullish for U.S. commodity prices. And I am so bullish to my clients I snort, buy the breaks and don't be short!
January 8, 2001 Jerry F. Welch, Publisher Commodity Insight 152 Ennis Lake Road, Ennis, Montana 406-682-5225
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