First oil, next food?
How about $6 a gallon for milk or $7 for a loaf of bread? Will speculation on commodity futures together with increased demand for corn for Ethanol cause rocketing food prices over the next two years?
2006 saw record oil prices with the cause being laid on demand from the growing economies such as India and China coupled with a speculative bubble created by investors. Yet as we move into 2007, we see oil prices dropping to a 20 month low of $50 a barrel and OPEC considering production cuts to shore up the price of oil. The WSJ has an article about this today with the caption "High prices prod developed world to curb oil use". While the developed world may be burning less oil, the price drop is as much a function of heavy selling by financial funds.
But as any investor will tell you, if there isn't a return to be made in one sector, money will flow into a sector that offers the promise (hope?) of a better return.
Today's New York Times has a very disturbing article about "Wall Street betting on the Farm" which describes how Wall Street funds are controlling significant percentages of the futures contracts for commodities – not just corn, but wheat, pigs and cattle. There is growing risk of a speculative bubble driving up food prices.
Time will tell how this unfolds but (no pun intended) it's certainly food for thought. The global capital pools have become so large that changes in investment allocations drive tidal waves through the economy.