Photo: Paul Kedrosky
Throughout 2010, commodities prices have been surging The reason: some say more easy money from the Fed, other, increasing demand from emerging markets.
Whether it’s QE or not the surge is real, and the result is going to start to hit consumers through food prices.
But just what commodities are being affected by this surge?
QE2 had a massive immediate impact on grain prices.
From Societe Generale:
However, when the US Federal Reserve announced the size of its second quantitative easing scheme - nicknamed QE2 - last week, the grain complex moved more decidedly upwards. On 4 November, the day after the Fed announcement, corn rose by 1.5% and closed at USc590/bu, while wheat gained 3.4% and soybean 3%.
But what's more important, according to SocGen, is that the threat of future QE is firmly in place. This is increasing expectations for future demand, but also sending the signal that the dollar is going to be in long-term decline. That dollar decline makes makes importing grain in foreign currencies cheaper, and drives up its value.
In the long term, this could discourage domestic production, if U.S. producers undercut local prices.
But global demand is rising at exactly the same time.
Emerging markets like China and India are requiring more imports to meet domestic demand, and with the cost of importing from America declining, much of the grain is coming from there.
That too is driving up the cost for American consumers, and consumers worldwide.
Result: It is the perfect combination of rising demand and a weakening dollar that is sending food component costs higher.
Now as for the commodities affected...
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