The Great Commodity Bubble of 2011?

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Includes: COPX, CORN, CRBA, CU, DBC, DBS, IEZ, OIH, PALL, PSCE, PXJ, SIL, SLV
by: Surly Trader

In the future they might coin this the “Bernanke Effect” or maybe the great commodity bubble of 2011. The truth is that commodity prices are rising…dramatically. You might have started to notice this disconnect in your grocery store shopping or in gasoline prices, but if you were to ask our government they would tell you that a basket of goods consumed (CPI) is rising modestly. How modest do these numbers (click to enlarge image) appear to you?

Sugar and corn? Those are luxury goods.

If the basic ingredients to food are skyrocketing, then prices of food will eventually have to keep pace which will directly hurt consumers.

Of the 853 ETFs that I looked at, which unleveraged funds do you think had the greatest return over that same time period? It is not a trick question (click to enlarge):

Are you noticing a theme?

My conclusion is simple: this time is NOT different. Commodity prices cannot go up forever and China will not continue to support the market regardless of prices. What is this “Bernanke Effect” doing to farmland prices? Well, according to a survey by Farmer’s National Company:

Non-irrigated crop land in central Kansas averaged $3,000 an acre, up 50 percent since June

Crop prices have seen an extraordinary run since early July. A bushel of wheat priced about $4 a bushel on July 4 is now more than $8.50. Other crops have experienced similar increases.

As the land generates more income, it puts more cash in the pockets of the most likely buyers, nearby farmers. It also provides an attractive return for investors who then rent it out to farmers.

The result: Auctions are drawing twice the number of bidders as before, said area agents.

As with all hot speculation, the commodity run will surely come to an end and will probably have repercussions for all financial markets. We should have learned by now that large financial dislocations tend to not occur in isolation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.