INFLATION: IT'S BAAAAACK

Markets: While you (and I) were sleeping, the prices of grains on the CBOT have gone to the moon. Corn at $4 is near the flood year $5 which was actually a spike high; soybeans at $8 is super high as well. So? Those two crops are feed grain crops, high prices there mean higher prices for ALL meats including chicken. It's inflationary. Corn is almost 100% higher than normal and beans are 50% higher. So watch out. Some people will say those grains are just for animals and that the people food is all OK. Not so, because of the ethanol hysteria, lots of farmers have switched from sweet corn (the stuff humans eat) to (livestock) feed corn.

So is this speculator fueled or supply-demand fueled? Commodities are most always supply-demand fueled. That is because you always know what is in the pipeline (in the ground, planning to be in the ground, and in storage from prior years), so barring artificial supply limitations you have an "honest" market. Crude is now speculator driven with no relation to supply and demand; the principal factor in the price rise is fear. So isn't corn totally speculative? You could say that. The cost of converting corn to motor fuel is prohibitive without government subsidies. And corn is one of the worst sources of ethanol because only about ten percent of the plant can be converted to fuel while 90% of the cane sugar plant can be converted.

The utility of futures markets is clear to all who look at real estate prices. Without a mechanism to "warn" of too much or too little inventory nobody can know anything about the housing market---until it's too late. We are left to divine the prices from erratic data; housing starts only represent those houses financed through banks or other large lenders; new home sales are bullshit because of the number of private sales AND the variables of location (CA prices are not the same as SD prices). There cannot be a futures market in real estate because there is no way to standardize the contract; all housing is different in every material way.

Standardization of grain markets: Grain deliveries, for example, are standardized qualities by definition in the futures market contract. If you deliver a lesser than contract quality you get less money upon delivery, a higher quality delivered means that you will get more. So without the futures market mechanism in real estate you are left with news reports that are (now more than ever) unreliable at best, and purely fiction at worst, in a press that is politically driven.

6AM add: what are called "crop reports," the USDA estimate of crops to be planted, have come out. They indicate the largest corn crop since WWII (a fake number if there ever was one, since counting corn acreage back then was like counting grains of sand on the beach while blindfolded), but a very high number no matter how you slice it. Meaning: lower corn futures prices for now and much higher bean prices due to the "switch" from beans to corn by farmers. An aside: there may not be enough fertilizer available to satisfy requirements for this acreage because they are planting corn where no corn has been planted before (Corn is being planted in New York City for Christ sakes); I posted a long time ago about the insanity of ethanol because to really satisfy the "need" we would have to plant every acre in the country with nothing left over on which to live.

Fertilizer? Dam right. Corn is being planted in unsuitable ground. This means huge quantities of fertilizer will be necessary in order to get a crop. It gets worse: corn requires nitrogen fertilizer and the only way to get it is to liquefy it, load it into tanker trucks, and deliver it to the farms through expensive hoses. Beans on the other hand manufactures its own nitrogen. In fact beans are so good at returning nitrogen into the ground that they are often used in "rotation" with hydrogen slurping corn. What happens? The corn that is planted in bean nurtured nitrogen rich soil means that the resulting corn crop needs little or no fertilization.

The chart below is corn. You will see that the price came down hard starting back in February. Why? Because the farmers and processors basically knew the planting intentions long before the reports.

Anyway it's inflation. Bad weather will mean even more inflation.Oh, and PBS (believe it or not) actually did a small bit on the manufactured hype for both Hybrid and Hydrogen powered cars. Hybrids only save you money and gas if all you do is stop and go driving in large cities without using freeways. Hydrogen is totally insane because there is no economical way to get it and put it in cars; the costs are insane, use far more energy than they save, and besides it isn't approved by Gore. My daughter has a hybrid and she saves zero. She has one "to make a statement."