You’d think that everyone would be piling money into canola production considering the new high prices, right?
Or you’d think no one would want to invest much money in canola or other crop production considering the mediocre prices and high risks, right?
The same could be asked of oil: today has both high and mediocre prices, depending on how you look at it. And what may seem like a sure bet from one perspective might look too risky from another. What do these two charts say to you:
The canola chart says both that canola prices are down and up. They’re down a bunch compared to the prices of a couple of years ago. They’re at the top of the long term range compared to five years ago. So what are they, high or low? The same conundrum applies to oil prices. If you were an oil producer, how would you feel about the chart above? Are prices good or bad? They’re above the high points of the previous long term range. They’re only half of the peak they reached two years ago.
I raise this topic because I’m always interested in the question of why commodity booms tend to last and aren’t immediately snuffed out by massive investment in a products that are bringing higher prices. Commodities guru Jim Rogers discusses this at length in his 2003 book Hot Commodities, offering reams of reasons why commodity booms are allowed to take off and keep flying even though commodity producers begin making lots of money. There are all sorts of reasons why you can’t just jack up commodity production. He has an interesting chapter on lead – the metal – prices and why they can soar but no one opens another lead smelter. Not only does it take years and masses of financing to develop a lead mine and smelter, but you need to get approvals from local governments and local NIMBYs who likely aren’t too keen on you spewing lead fumes into the air their children breath. So lead production has a heck of a time increasing, no matter how much prices increase.
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We’re seeing that right now with oil production. Prices are far above where they were a decade ago, almost unbelievably so from the perspective of 1999, but it’s pretty freakin hard to put new production into operation. Just look at the mess in the Gulf of Mexico: lots and lots of oil there, lots and lots of chances to make money sucking it out, huge new roadblocks to doing it because of the present massive spill. U.S. president Barack Obama has lifted licenses and slapped restrictions on drilling offshore, restrictions exist against drilling close to shore already, coal is getting slapped around with carbon emission restrictions and instead of seeing a massive increase in U.S. oil production in reaction to the new, higher prices, it’s having trouble slowing its decline as present U.S. reserves run down. People complain about Big Oil and high prices, but also get mad about Big Oil and oil spills. The opposite political reactions to the two factors – “drill baby drill” versus “shut baby shut” – leave supplies much tighter than prices by themselves would draw out.
But there’s a deeper factor out there cramping commodity supply increase, methinks. And that’s that we live in the middle of our times and can’t stand back from afar and look at them. Are we actually living in the midst of a long term commodity boom? There’s been a big slump in the commodities and crop complexes since 2008: was all that long term commodity bull market boom talk just a bunch of tripe? Prices don’t seem high now, especially not for commodity producers like farmers who have to buy other commodities like fuel and fertilizer to produce their commodities.
On the charts it still looks to me like we’re living inside a price structure that supports the argument for a long term commodity bull market. Canola prices today are disappointing lots of farmers, but a few years ago these would have seemed like good prices. If, like lots of crop market analysts say, we’re at the bottom of our crop price ranges, then there’s no reason to think we’re not in a new era of higher prices. But the volatility sucks away people’s confidence that they can see the future of prices and confidently feeling and investing on the belief that we’ve hit a new plateau is hard to do when the market is so unpredictable.
Luckily – maybe – for us, it’s relatively easy for farmers to borrow and invest money in their farms. That may get farmers into problems when they borrow too much and prices drop or they don’t get good crops, but it also allows farmers here to make good money when the crops come in and prices rise. That isn’t the case in most of the rest of the world, where financing is primitive and there’s little to backstop farm finances. So we may get to the point where right now does prove to be the bottom of the new range, higher prices return and we can max out our prairie yields to benefit from the market, while many of our other competitors haven’t been able to invest enough in their farms to do more than feel envious of us.
So we may be living in a new higher range of crop prices and set to be the biggest beneficiaries of it. But it sure doesn’t feel that way right now, does it? And that’s exactly why production doesn’t immediately and consistently soar in a long term commodity bull market: the new higher prices don’t feel so high, and when they do, it’s just for a minute.
