MONEY MATTERS: The high cost of eating

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(TIM SMITH / BRANDON SUN ARCHIVES)

When it comes to commodities, the prices for wheat, oats, chickpeas -- you name it -- are generally not hot topics of discussion for people concerned about their investment portfolios. For that matter, few even think about the crop prices' implications on their pocketbooks when they go grocery shopping.

Yet, just as much as oil, gold or natural gas, these commodities can have a profound impact on nations' economies, and more specifically, our everyday lives.

Winnipeg has a long history in the crop business -- at one time home to the Commodity Exchange. Even today it's still considered a hub of expertise and market activity, recently hosting Wild Oats Grainworld 2013, the nation's leading conference on grain market outlook.

For the most part, lectures that take place at such events are of little interest to people who don't make a living in the sector.

But one local crop analyst presenting at the conference offered a startling prediction on the direction of crop prices, oil, gas and interest rates that should catch more than just the attention of traders and producers.

Harold Davis is a local crop analyst who runs his own consulting business providing price charts for prairie crops.

Davis is a veteran of the investment world. He started out in Winnipeg in the early '70s, has worked all over the world as an institutional trader, including managing sovereign investment funds, and now runs Prairie Crop Charts.

Davis is chartist. He studies price charts of commodities and securities. He is both a technical trader, using chart patterns to help time the market, and a fundamental trader, who tries to understand what economic, financial, political, environmental and social factors may cause prices to move up or down.

The charts speak to him -- as they do for many technical traders. And it's clear after talking to him at length about markets that his experience as an institutional trader adds a level of depth and understanding about price movements few can match.

And while his talk at the conference focused mainly on crop prices, it also served as a warning shot for traders, producers and consumers alike.

"For a lot of people in agri-business, or for that matter, a lot of people at street level, the world is about to change, and it's not going to be quite as simple and as pleasant as it has been in past years," he says.

"You might say to yourself, 'That's an odd thing to say because since the 2008 crash there has already been a lot of hardship in certain parts of the world,' and my view is that not only is that period of hardship not over, certain aspects of it may accelerate."

Davis says farmers are facing a good news/bad news scenario in the coming years. Prices for most crops are likely to increase dramatically. Even crops like canola, already trading near all-time highs, are likely to move higher, and crops like mustard seed, which have been down substantially since 2008, are showing signs of life.

Based on what he sees across many charts, prices are poised for some significant seismic activity.

"Given there's been a decade of long slow (growth) upward, the odds are the explosive price move will be to the upside."

Even when prices have fallen of late, they haven't dropped down to historical trading ranges in most cases. For a chartist, this points to higher prices, possibly much higher prices.

All this sounds like good news for grain and seed farmers -- especially now that the market is becoming more open with increased options for them to sell, he says.

The problem is charts for other commodities are also showing similar patterns, indicating possible up-trends.

"We're going to likely see some great crop prices, but oil will be more expensive, too," Davis says.

On the one hand, producers will see increased prices for crops, while dealing with higher costs for diesel and fertilizer, on the other. In recent months, prices for a major fertilizer input -- urea -- have been unusually low because the price for natural gas -- a major input for urea production -- has fallen dramatically, the result of innovations in hydraulic fracturing (a.k.a. fracking) that enable energy producers to tap previously inaccessible reserves.

But the downtrend for natural gas prices is slowing, Davis says.

"Moreover, all that increase in supply from fracking only caused a four- or five-month violation of the 25-year uptrend line on the chart," he says. "In other words, some commodities that have been favourable to farm profitability are at their lows and are likely to be popping up in price eventually."

Compounding the worries for producers will be price volatility. Although prices across the board are expected to rise, they will be all over the map with large up and down swings.

"When we have to ask why something could be moving the fertilizer market, why something could be moving the natural gas market and why something could be moving the price of crops, it leads one to think that perhaps there's inflation," Davis says.

With U.S. public debt at 102 per cent of GDP, and many other nations, including Canada, adrift on seas of red ink, we're in uncharted territory.

"We're now at a level of debt that no economist can tell you with a straight face that he or she knows how the economy is going to behave," he says. "They cannot tell you that pushing the monetary buttons will get the desired result, and that when they start pulling on the levers, they're going to work correctly."

The monetary policies -- such as quantitative easing -- used to bail out the economies of the world after 2008 are only now beginning to show their intended and unintended consequences.

And Davis says crop prices may be the canary in the mine. If prices run too high, too quickly, the public will take notice -- and not in a good way. Politicians will feel the heat.

"The political demands can get so great that politicians will buckle and do unpredictable things," he says.

Davis says he remembers the wild rides as a trader during the high inflation of the 1970s and the double-digit interest rates that followed in the 1980s.

But he wonders how many in management positions today, in companies of all kinds, remember those turbulent times.

"I think many may have no idea what's it's like to have your balance sheet and earnings trashed by double-digit interest rates."

The same goes for many crop producers, who are more leveraged than ever.

"In addition to higher fertilizer and energy costs, a lot of people may have to start dealing with higher borrowing costs," Davis says.

But it's not just businesses and farmers that will feel the pain.

So too will highly indebted households living on static incomes and facing potentially much higher costs to put food on the table.

Of course, this world according to charts foretells events that may never come to pass.

Still, an omen shouldn't be entirely ignored.

"We have a level of complacency based on a fool's price for money," Davis says. "Some of these things can be painful."

Quick facts

Worried about inflation?

You're not alone. Many investors have been flocking to assets that often to do well during times of faster than normal price hikes. Here's a look at a few options:

Gold: Much of the reason for gold's meteoric rise over the last 13 years is due to fears about expanding government balance sheets. People fear there's too much paper money out there chasing too few goods and it is only a matter of time before gold returns to its rightful place as the true global currency. Investors have plenty of options to hold the precious metal. They can buy the real gold, or own it through a mutual fund or ETF. Keep in mind, however, gold is both expensive right now and prone to wild price swings.

Inflation protected bonds: These are government-issued bonds that adjust interest payments based on the consumer price index, used to measure of inflation. Canada issues Real Return Bonds and the in the U.S., there are TIPS, Treasury Inflation Protected Securities. Investors can also purchase real return bond mutual funds and ETFs.

Invest in commodities: Futures contracts are the traditional way to invest in commodities, but for most people, this strategy is complex, risky and requires a fair amount of money. Retail investors are likely better off buying ETFs that invest directly in commodities like gold, oil and natural gas.

Pay down debt: When there's inflation, central bankers tend to hike interest rates, which increase the cost of borrowing. One straight-forward way for families to battle inflation is to pay off debt as quickly as possible, especially before rate increases occur.

Invest in the stock market: Bonds tend to do poorly in inflationary environments because central bankers increase interest rates to slow inflation down. In contrast, stock markets tend to do well because inflation leads to higher prices, including shares of companies. In fact, one could argue the Dow Jones Industrial Index hitting record highs this week is less the result of bullish investors and more a symptom of inflation.

Inflation... what is it really? Inflation is a necessary element of a healthy economy. Rising prices are the result of increased demand and growth, but too much inflation creates instability. Businesses and households can't keep pace. Typically inflation is based upon the Consumer Price Index (CPI), a calculation of the collective price of a basket of goods, and the change in CPI year over year is expressed as inflation. The Bank of Canada's primary role is to keep inflation between one and three per cent, with two per cent being just right. The latest Statistics Canada figures show inflation in Canada at 0.5 per cent.

Republished from the Winnipeg Free Press print edition March 9, 2013 B10