Agricultural Commodities Breaking Down - Start Of Another Great Depression?

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Includes: BAL, CORN, COW, GLD, GRU, JO, NIB, PHYS, PSLV, RJA, SGG, SLV, SOYB
by: Katchum

When we take a look at history and go back to the Great Depression, we find that agriculture (NYSEARCA:RJA) is a leading indicator for the economy. During the recession in 1930 we saw that agriculture prices declined very rapidly (for example, cotton prices dropped 18% in just one week). A few years after that, the Great Depression initiated at full force with bank deposits being frozen. This started the Great Depression of 1932.

Today, the same is happening with agricultural commodities. Cotton dropped 10% in 1 week and is now down 20% in two weeks' time (Chart 3). All other agricultural commodities have been very weak since the start of 2012 with the exception of soybeans (Chart 5). The CRB index has also hit a new 2 year low (Chart 0).

Weakness in agriculture today is the evidence that the Great Depression is now being repeated. The only commodities that went up during the Great Depression were gold, along with the gold/silver mining shares. As for the bank deposits being frozen in the Great Depression, we already see this happening in Greece and Spain in the form of bank runs. Global stock markets are now tied up with each other as opposed to stock markets in the past. So we will see these events happening all over the world through contagion.

Below, I will give a short update on the status of the 8 key agricultural commodities.

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Chart 0: CRB Index

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Corn prices (NYSEARCA:CORN) were weak due to decreasing demand from China. Export sales were weak and due to rain, crops are benefiting from the improved weather conditions.

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Chart 1: Corn Price

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Wheat prices (NYSEARCA:GRU) enjoyed a price recovery the last few weeks due to drought and tightening supply for the rest of the year. Though wheat prices are still at historic lows.

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Chart 2: Wheat Price

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Cotton prices (NYSEARCA:BAL) will continue to slump as supply is increasing. Although cotton prices are to be weak for the rest of the year, China is in need of cotton and will put upward pressure on cotton prices.

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Chart 3: Cotton Price

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Cattle prices (NYSEARCA:COW) should revive later this year due to tight supply in the beef market.

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Chart 4: Live Cattle Price

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Soybean prices (NYSEARCA:SOYB) have been supported by bad harvests in Latin America. Stockpiles are at record lows and will continue to support soybean prices as production drops.

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Chart 5: Soybean Price

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Coffee prices (NYSEARCA:JO) dropped almost 50% from its highs due to near record production in Brazil. Arabica coffee prices are vulnerable to price spikes at these low price levels.

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Chart 6: Coffee Price

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Cocoa prices (NYSEARCA:NIB) have been weak in 2011, but could regain their losses during the second half of this year due to a drop in supply in the Ivory Coast.

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Chart 7: Cocoa Price

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Sugar prices (NYSEARCA:SGG) continue to be supportive due to bad weather concerns. The price decline is attributed to higher supplies from India and Thailand. The dip in sugar may not last any longer and we will likely see sugar prices move upwards.

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Chart 8: Sugar Price

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Disclosure: I am long PSLV, AGQ, PHYS.