All markets have bounced back from the early March lows much better than what anyone would have expected.
Investment funds are back in the commodity market, adding fuel to the rally.
But the number of voices urging caution is increasing. They say markets are getting ahead of the real economy, which is still struggling with large unemployment and a devastated American housing market.
There have been signs of business revival, but they are in danger of being snuffed out by rising input costs associated with rising commodity prices, especially oil, which flirted with $70 US per barrel in New York last week, about 66 percent higher than the low this year of about 4$2.
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It is a scenario similar to the one that developed in the late 1970s. It was called stagflation, the combination of a stagnant economy pressured by rising inflation.
Back then, central banks fought inflation by increasing interest rates, but that sapped the ability of business to grow. Speculation last week that U.S. interest rates might rise helped the American currency rebound from its multi-week decline.
This scenario throws into doubt the hope of optimists that a chart of the current recession could be v-shaped with a sharp and steady rebound off the bottom. The chart might be more w-shaped, with more than one bottom.
And if markets generally drop and investor and consumer confidence is shaken as it was last fall, agricultural commodity prices will fall again, regardless of what the fundamentals might signal.
Current fundamentals are mostly supportive of prices, including delayed crop development in Western Canada, drought reduced South American crops, corn seeding delays in the U.S. and dry soils in southern Europe and northern China.
Also, prospects for the next crop in South America and Australia are in doubt because of a developing El Nino that could generate bad crop weather in the second half of the year.
All this supports crop prices, but they likely would not be as high as they are if oil was still mired at its mid-February level of $42.
While there is an argument for strong crop prices, there is little to justify high oil prices, which are based on the hope of rising demand, not the fact. For now, oil supply is more than adequate for the demand.
The take home message from all this is that, like last year, there is more at work in crop market direction than simply grain supply and demand.
It would a good idea to keep watch on oil prices and broad indicators of economic activity like monthly gross domestic product trends and employment because if any of them falter, we could be headed for that second low point in a w-shaped recession.
