The moves in oil, gold, and even wheat are all telling us something. First, they’re telling us that the U.S. dollar is headed for the black pit of currency hell, where poorly managed fiat currencies go to suffer and die. And here’s a question for you: how low will the dollar have to go before OPEC and oil producers like Russia start asking to be paid in a currency that isn’t going down the toilet? How much lower would the greenback go if Russia—the world’s second-largest oil producer—moved to price its crude in euros?
Don’t get us wrong. The rising price of oil indicates a bullish fundamental situation, where demand is growing faster than supply. But the recent price action in oil is more indicative of dollar weakness than oil strength. We suspect oil producers are not keen to get paid in a currency that’s worth less and less with each passing day.
Meanwhile, the 200-year down cycle in commodity prices is reversing itself in the face of six billion hungry people. December wheat on the Chicago Board of Trade went as high as US$9.11 overnight—an all time high. This came at the same time US wheat stockpiles are at a 33-year low.
So many mouths to feed. If only human beings could run on ethanol.
Though wheat prices have doubled, the share prices of Aussie producers have actually fallen. Greg Canavan at Fat Prophets explains, “The grains industry is inherently cyclical, and now there are concerns about the crop…With the prospect of lower volumes, they cop it, because they have high fixed costs.”
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Coffee Addict on 14 September 2007:
There are still grounds to be bullish about the Australian wheat crop. Greg Canavan is overstating the risk. In other words he's wrong, although it is clearly in the interests of his clients that he talk up the wheat price.
There has been reasonable rain over the past 3 months and there is, as a consequence, residual soil moisture. In addition there are a few minor fronts coming from the south.
You don't have to rely on what I may say or my observation that unwatered lawns in the wheat belt are being mowed as I look out the window.
Check out the Bureau of Meteorology 3 month rainfall map for Australia to the end of August 2007.http://www.bom.gov.au/cgi-bin/climate/rainmaps.cgi?page=map&variable=totals&period=3month&area=aus
In a nutshell the crop may not be fantastic but it won't be a disaster either.