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Commodity prices heading skyward
While some call the price rise a bubble, others see sound reasons for the run-up in a variety of U.S. commodities.
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Grain or gold, eggs or oil, beef or iron, the prices of many commodities have been heading up. And some see the sector as the successor to stocks in the '90s and housing in the early years of this decade -- the next great bull market.
A convergence of forces is helping push up prices, and while Minnesota farmers are benefiting from the turnaround, consumers are likely to pay higher prices for everything from doughnuts to diesel fuel.
"This is the beginning of a bubble," said Jim Bower, owner of Bower Trading Co. in Lafayette, Ind., and a 30-year veteran of commodities trading. "The question is how much air we can pump into that bubble before it bursts."
But other commodities watchers see sound economic reasons behind the run-up in a wide array of the raw ingredients of many foods and industrial products, not just the new place for hot money to find a home.
"The information we have suggests it's not just speculation," said Dan Laufenberg, chief economist of Ameriprise Financial in Minneapolis.
David Joy, chief market strategist at RiverSource Investments in Minneapolis, agrees. "By and large, most of the demand is real, coming from the industrialization process in the Far East, particularly China and India."
Growing economies in the developing world not only have bid up the price of iron, copper and other industrial metals but also have kept demand strong for foodstuffs from Minnesota and other parts of the world's breadbasket.
The voracious appetite of ethanol plants for corn also has sent ripples throughout the food chain, as growers shift away from other crops --raising prices on commodities such as wheat and soybeans.
For instance, the latest U.S. Department of Agriculture forecast for Minnesota calls for a corn harvest of 7.7 million acres, up 12 percent from last year. Meanwhile, soybean acreage in Minnesota is expected to be 6.2 million acres, a 15 percent decline from last year.
Ed Usset, a University of Minnesota grain specialist, said corn has been the engine pulling prices higher on all manner of farm goods, from grains to meats to eggs.
"The answer is ethanol, whatever the question is about this grain or that commodity," he said.
Higher farm prices will reverberate through the rural Minnesota economy, bringing prosperity not only to farmers but to sellers of farm implements, fertilizer and pesticides, said Toby Madden, regional economist at the Federal Reserve Bank of Minneapolis.
Inevitably, those higher prices will be passed along to consumers, raising inflation fears, Madden said.
But he said not all commodity prices are heading up. "That can be offset somewhat by people buying cheaper goods," Madden said. Among the commodities where prices are falling: electronic components, lumber and gypsum.
What's more, pushed higher by oil prices and strong demand, the cost of fertilizer, pesticides and fuel to run farm implements has been rising faster than the double-digit gains in some grain prices, said Kent Olson, a University of Minnesota farm management professor.
Farm "income isn't going to be going up as much as the price looks like it is," Olson said. "Costs have been going up right with them."
Southwest Minnesota farmers are spending $6.70 to produce a bushel of soybeans -- up $1 from a year ago, Olson said. Prices for that bushel have increased from $4.96 last year to $8.14 now.
Jim Paulsen, chief investment strategist at Wells Capital Management, believes the commodity price run-up is far from over.
A weak dollar and strong economic growth in other parts of the world may drive prices up for quite some time, despite occasional pullbacks, he said.
"One of the shocking things for us is we had almost a quarter-century when commodities went down," Paulsen said. "Now for five years they've gone up. So it must be a bubble? I don't think so."
His best estimate on rising commodity prices: "We're early in this, not late."
Mike Meyers • 612-673-1746
Mike Meyers • meyers@startribune.com
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