We are sure that the mainstream press is set to project the October spike high in the CRB Index as a major top. Certainly the energy and metals markets appear to be overbought, and certainly there is concern that US growth was tripped up by the double hurricane hit. On the other hand, the US Federal Reserve sees the negative impact off the hurricanes to be a temporary situation and has also suggested that the stimulus provided by the recovery effort could result in a multi year economic stimulus. It would also seem like the US economy entered into the storm period in a slightly stronger position than was initially projected, and with an up tick in European economic activity and ongoing growth in Asia, we suspect that an October slide in the CRB will simply be a temporary condition. Some traders suggest that the flare in energy prices off the storms represents a critical top, but with some estimates putting the US losses around 50 million barrels of oil and 226 bcf of natural gas into the first week of October, that probably means that oil prices have been entrenched at yet another higher level. So far it would seem like the world economy has been slowed but not broken by the consistent rise in oil prices. In the coming weeks we suspect that more oil and gas supply will come on line, and the anxiety off the storms will allow economic sentiment to improve. We also think the slide in oil prices off the recent highs will improve consumer and investing sentiment and in the process allow the world economy to regain its footing. However, from recent US Federal Reserve commentary it is clear that inflation remains a front burner issue and that even higher US interest rates are probably ahead. It is also clear that the ultra high price of oil and the general ongoing pattern of global growth are now resulting in a "passing on" of higher prices. Over the last 30 years, there have been few instances of "passing on costs," as recession, generally abundant commodity supplies and cheap labor from China or other developing areas have limited the potential for true inflation. Several times over the last several months we have hinted at the prospect of creeping inflation as many prices seemed to be on the rise yet government stats were failing to pick up on it. Now it seems that high oil prices have passed an inflection point and that most businesses and many consumers will be confronted with the issue. While some will suggest that high oil will slow growth and in the process kill off the inflation threat, we suggest that consumers have not been dramatically influenced by high gas prices and will not be as impacted by high heating costs in the coming winter as many might expect. In fact, once the cloud from the hurricanes passes, we expect global equity prices to recover and in the process we suspect that deflated commodity prices to be eradicated. We think that the grain markets will see a classic impact off the rising price environment in 2006 as input costs are sure to add to their existing multi year pattern, and in many cases that should result in lower yields. We also suspect that irrigated grain production will see similar production declines. Certainly it is not a sure bet that natural gas prices will remain at extreme levels into next spring, but it is also possible that natural gas prices significantly extend their gains into the coming North American winter, which could further reduce the inputs into the 2006 crop. Without getting into the relative standing of world grain ending stocks, consumption patterns and other analysis, we will make the following statement: the influence of high energy prices is going to make stellar grain production more difficult to come by. Given ongoing global growth, rising inflationary expectations and the push from oil prices, we suspect that soybean oil, wheat, corn, cotton, and silver prices will see significant price gains in the coming year!
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