Using futures to fix procurement prices is a good idea as this will link them to global prices and appears the only way to get farmers to sell their stocks to the government.
There are four interesting facts about the wheat scenario in India. The RBI Annual Report indicates that wheat production this year has been 74.9 million tonnes which is 5.5 million tonnes higher than that last year. The second is that the government is importing wheat at close to $390 per tonne. The third is that the procurement this year by the FCI has been 11 million tonnes which is higher than the 9.2 million tonnes last year but still lower than the targeted amount of 15 million tonnes. The last is that the minimum support price offered to the farmers was Rs 850 per quintal, after an additional bonus of Rs 100 was offered to them over the Rs 750 announced earlier, when it looked likely that the procurement target would not be met.
These facts are interesting for more than one reason as they individually raise a series of issues which need to be pieced together cogently. The first question is whether or not production is really higher than what it was last year. This is important because the import of wheat needs to be justified on grounds of lower production.
If the production number is correct, then the government is importing wheat because it is not able to procure the same from the farmers. In fact, with a marketed surplus of 63 per cent, there is actually 47 million tonnes which has come to the market (or partly held at home) of which only 11.1 million has gone to the government. Why should this be so?
The farmers are not selling because either they want a better price and are progressively aware of the market prices thanks to futures trading (before the ban) or due to the entry of private players. This, in turn, means that the price of Rs 850 offered is very low. A farmer may feel that he deserves a better price considering that the government is paying $390 per tonne which works out to over Rs 1,500 per quintal as global prices are on the rise due to supply issues, which is 75 per cent higher than what was offered to the Indian farmer.
This issue could have been ignored as being an unusual aberration but for the fact that the government has had a problem on the procurement end for the second successive year — the first was a deficit production year, while the second has been a year for surplus. Evidently, a strategy needs to be devised to ensure that there is no repetition of the same in the next year.
The basic issue goes back to the government procurement of wheat. Procurement has a bearing on the output perception, the future minimum support price (MSP), the current price as well as import decisions. Ideally the government may have to review the MSP system as the MSP is supposed to be a price support system and not necessarily a procurement aid. By attempting to target both the objectives with one instrument, a contradiction has arisen. In fact, economic theory always says that rarely can one achieve two objectives with one instrument.
This is so, as we have noticed that the farmers have become progressively more aware of the market conditions and are in a position to demand the same from the government. Therefore, even in years of good production such as 2007, while production has been steady, the procurement programme has run into an impasse.
It is said that some of the private players were offering prices of over Rs 2,000 a quintal for some grades of wheat. If this were so, then evidently there is a market price which is quite different from the MSP and we need to either change the MSP calculation or keep it as a benchmark and use the market to get signals for procurement.
The futures market was providing valuable signals of the wheat price, which can provide an alternative for determining procurement prices. The futures price can be used to fix the MSP so that the FCI is able to purchase the requisite amount at a fair market price. Hence, we will have the traditional MSP which serves as the base price, while the futures price will be the actually Implemented Procurement Price (IPP).
The IPP could be variable with the market price or also fixed in advance based on the futures price so as to be market-aligned. An analogy could be borrowed from the money market here. This would be similar to the bank rate and the repo rate, where the bank rate is the benchmark, and the fixed repo rate mimics the same based on market conditions through the RBI policy. This way the farmers are assured of a fair price which is the market price. If the market price falls to low levels, then the benchmark MSP could be used for the same purpose. This would eschew the need to import wheat when there are surpluses in the country.
The major problem here is that the MSP is serving as a base price-cum-procurement price which is progressively becoming anachronistic in a market-driven system. Private players are pushing aggressively for wheat given the retail boom, which is only going to explode further. Futures markets had provided price information to a considerable section of the farmer population so that they could ask for a higher price in the market. The government, hence, has become just another player that will have to procure at market rates.
Again, to draw a comparison with the G-sec market, the T-bills which were issued to finance the budget got away with a 4.6 per cent rate prior to liberalisation. Once this segment opened up, the government had to pay a higher rate. So, shouldn’t the same thing happen in the case of wheat?
Friday, September 21, 2007
Tuesday, September 18, 2007
Country, ball by ball, Indian Express, 18th September 2007
Cricket, whether is the Test, One-day or Twenty-20 variety, is always the flavour of the season in India. And if the spectators have their quirks, so do those who inhabit the commentary box. The discerning viewer can perceive on his/her TV screen whether the ball hit the bat or the pad. But the non-discerning patriot only wants to know if we have hit a six or whether the opponent is out.
If you had followed cricket in the eighties and early nineties, you will recollect that Sunil Gavaskar, Ravi Shastri and Mohindar Amarnath were three great Indian cricketers who were responsible for almost all our losses in one-day matches as they could never really distinguish between the limited overs and the five-day versions of the game. Now that each one of them has metamorphosed into important TV commentators, it is refreshing to hear them talk very profoundly on how one-day games must be approached and when the accelerator needs to be pressed.
When master blaster Sachin Tendulkar comes out to bat, Gavaskar or Harsha Bhogle will invariably tell you that there is a “tense hush” as the great man comes in. Unfortunately, Tendulkar then proceeds to get out early in his innings. But as far as Messrs Gavaskar, Bhogle are concerned, this is never for any fault of his. They will invariably lament that the ball did not touch the bat or, even if it did hit the pads, it would have missed the stumps by at least eight inches. They can never understand how any umpire can give such a decision. And Gavaskar will add, “Frankly, that was a bad decision.”
It is always “unfortunate” that Tendulkar gets out at 0, 1, 4 and 99 due to incorrect umpiring decisions. This can only mean that there is some bias against our master blaster. But what is amazing is that the whole world seems to be against him.
Umpires everywhere, whether they happen to be English, Australian or Indian, are clearly biased when it comes to Tendulkar. And this is also why we always lose matches. Truly, Indian commentators smell of patriotism and never miss an opportunity to brandish it on TV.
If you had followed cricket in the eighties and early nineties, you will recollect that Sunil Gavaskar, Ravi Shastri and Mohindar Amarnath were three great Indian cricketers who were responsible for almost all our losses in one-day matches as they could never really distinguish between the limited overs and the five-day versions of the game. Now that each one of them has metamorphosed into important TV commentators, it is refreshing to hear them talk very profoundly on how one-day games must be approached and when the accelerator needs to be pressed.
When master blaster Sachin Tendulkar comes out to bat, Gavaskar or Harsha Bhogle will invariably tell you that there is a “tense hush” as the great man comes in. Unfortunately, Tendulkar then proceeds to get out early in his innings. But as far as Messrs Gavaskar, Bhogle are concerned, this is never for any fault of his. They will invariably lament that the ball did not touch the bat or, even if it did hit the pads, it would have missed the stumps by at least eight inches. They can never understand how any umpire can give such a decision. And Gavaskar will add, “Frankly, that was a bad decision.”
It is always “unfortunate” that Tendulkar gets out at 0, 1, 4 and 99 due to incorrect umpiring decisions. This can only mean that there is some bias against our master blaster. But what is amazing is that the whole world seems to be against him.
Umpires everywhere, whether they happen to be English, Australian or Indian, are clearly biased when it comes to Tendulkar. And this is also why we always lose matches. Truly, Indian commentators smell of patriotism and never miss an opportunity to brandish it on TV.
Monday, September 10, 2007
Riding the troika: RBI's Travails: Financial Express 10th September, 2007
The RBI must be the most harried institution in the country today. The irony is that this state of mind comes at a time when the FM is reiterating strong growth in the country which has been supported by the Economic Advisory Council of the PMO and the RBI itself. It does appear that the theoretical issue raised in textbooks on attaining internal and external equilibrium has resurfaced again creating a rather complex situation for the monetary authority.
There are presently three objectives before the RBI. The first is to maintain foreign exchange rate equilibrium — meaning a stable ‘currency rate movement’ regime. The second is to bring about growth with easy interest rates, and the third is price stability.
On the face of it there does not appear to be a problem with the rupee strengthening amid large forex inflows, stable inflation at around 4.4%, and demand for credit not picking up as yet. But, the monetary authority has to be forward looking and must assess potential inflation as inflationary expectations are more important than actual inflation; and these expectations are fed by the policy moves of the RBI.
Let us try and grasp as to what is happening presently. The rupee is appreciating due to large capital inflows. The trade deficit has widened but booming current receipts led by IT and software inflows as well as FDI, FII and ECB inflows have made the forex reserves swell. Last year, the foreign currency assets have risen on a point to point basis by $ 47 bn and the rupee strengthened by 2.3% with all the RBI interventions. But this year, so far foreign currency assets have risen by $ 26 bn and the rupee has strengthened by around 7%. Therefore, there is a concern here. One view is that the RBI cannot let the rupee appreciate too much, which though a theoretical solution would militate against exports and the IT sector. At the same time we cannot stop FDI or FII inflows as they are critical for the economy.
There has been some feeble attempt to curb the inflow of ECBs recently, ostensibly to check the possible carry-trade transactions being carried out given the interest rate differentials in India and the rest of the world.
Borrowings have been pegged to a band of up to Libor plus 250 bps limit, but the difference with Indian PLRs is still around 500 bps, which makes such trade attractive even after taking into account the other accompanying risks.
The result has been that the RBI is buying dollars in the market, which is creating monetary problems. When the RBI buys forex, then it has to provide domestic currency, which increases money supply. Rising money supply is inflationary as it has the potential to create excess demand forces. When money supply increases the RBI has to sterilize it with either market stabilization bonds (MSS) or curb the ability of banks to lend by increasing the CRR, which it has just done in the last policy, or increase interest rates. While this could have a soothing effect on inflation, it can create problems on growth. As of today this is not an issue, but with rising rates, investment would get affected. The reverse movement of interest rates in the late nineties will be in the RBI’s rear view mirror when monetary tightening led to a recession.
This situation is quite a contrast to what the Euro zone is facing today. The ECB has let the euro appreciate against the dollar, and has managed to maintain stable interest rates, though reserving the prerogative to raise interest rates to curb inflation if the rate starts to move up. Hence, it has been looking more inward than outward.
The case of China is quite different. China absorbs more dollars than India; so how does it manage the show. The central bank buys up dollars in the market and also virtually pegs the interest rate. This way there are no major issues when it comes to growth or inflation.
What are the solutions for the RBI? Logically, the rupee should be allowed to float and strengthen as markets are free and exporters cannot ask for protection and have to learn to be competitive. Besides, the RBI cannot and should not play favourites to any one group.
But, if this is not feasible, then attempts must be made to open up the capital account. While some measures have been taken earlier this year, this sounds a bold decision which could have severe repercussions if something goes amiss. Imagine a situation where we can invest freely in foreign capital markets or open a fixed deposit in a New York based bank instead of a domestic bank in Mumbai. This too appears to be far fetched presently. Besides, the liberalization of limits for investment is not really being used up and further action may not be useful. Putting curbs on ECBs cannot really be effective though it has had a good announcement effect.
Also we cannot stop other foreign flows from coming in.
The RBIs ride on the troika of exchange rate, interest rate and inflation is uneven. A decision needs to be taken or else the markets will be left conjecturing the next move, which could be unsettling. Therefore, a clear stance and targets need to be explained clearly to remove uncertainty.
There are presently three objectives before the RBI. The first is to maintain foreign exchange rate equilibrium — meaning a stable ‘currency rate movement’ regime. The second is to bring about growth with easy interest rates, and the third is price stability.
On the face of it there does not appear to be a problem with the rupee strengthening amid large forex inflows, stable inflation at around 4.4%, and demand for credit not picking up as yet. But, the monetary authority has to be forward looking and must assess potential inflation as inflationary expectations are more important than actual inflation; and these expectations are fed by the policy moves of the RBI.
Let us try and grasp as to what is happening presently. The rupee is appreciating due to large capital inflows. The trade deficit has widened but booming current receipts led by IT and software inflows as well as FDI, FII and ECB inflows have made the forex reserves swell. Last year, the foreign currency assets have risen on a point to point basis by $ 47 bn and the rupee strengthened by 2.3% with all the RBI interventions. But this year, so far foreign currency assets have risen by $ 26 bn and the rupee has strengthened by around 7%. Therefore, there is a concern here. One view is that the RBI cannot let the rupee appreciate too much, which though a theoretical solution would militate against exports and the IT sector. At the same time we cannot stop FDI or FII inflows as they are critical for the economy.
There has been some feeble attempt to curb the inflow of ECBs recently, ostensibly to check the possible carry-trade transactions being carried out given the interest rate differentials in India and the rest of the world.
Borrowings have been pegged to a band of up to Libor plus 250 bps limit, but the difference with Indian PLRs is still around 500 bps, which makes such trade attractive even after taking into account the other accompanying risks.
The result has been that the RBI is buying dollars in the market, which is creating monetary problems. When the RBI buys forex, then it has to provide domestic currency, which increases money supply. Rising money supply is inflationary as it has the potential to create excess demand forces. When money supply increases the RBI has to sterilize it with either market stabilization bonds (MSS) or curb the ability of banks to lend by increasing the CRR, which it has just done in the last policy, or increase interest rates. While this could have a soothing effect on inflation, it can create problems on growth. As of today this is not an issue, but with rising rates, investment would get affected. The reverse movement of interest rates in the late nineties will be in the RBI’s rear view mirror when monetary tightening led to a recession.
This situation is quite a contrast to what the Euro zone is facing today. The ECB has let the euro appreciate against the dollar, and has managed to maintain stable interest rates, though reserving the prerogative to raise interest rates to curb inflation if the rate starts to move up. Hence, it has been looking more inward than outward.
The case of China is quite different. China absorbs more dollars than India; so how does it manage the show. The central bank buys up dollars in the market and also virtually pegs the interest rate. This way there are no major issues when it comes to growth or inflation.
What are the solutions for the RBI? Logically, the rupee should be allowed to float and strengthen as markets are free and exporters cannot ask for protection and have to learn to be competitive. Besides, the RBI cannot and should not play favourites to any one group.
But, if this is not feasible, then attempts must be made to open up the capital account. While some measures have been taken earlier this year, this sounds a bold decision which could have severe repercussions if something goes amiss. Imagine a situation where we can invest freely in foreign capital markets or open a fixed deposit in a New York based bank instead of a domestic bank in Mumbai. This too appears to be far fetched presently. Besides, the liberalization of limits for investment is not really being used up and further action may not be useful. Putting curbs on ECBs cannot really be effective though it has had a good announcement effect.
Also we cannot stop other foreign flows from coming in.
The RBIs ride on the troika of exchange rate, interest rate and inflation is uneven. A decision needs to be taken or else the markets will be left conjecturing the next move, which could be unsettling. Therefore, a clear stance and targets need to be explained clearly to remove uncertainty.
Saturday, September 8, 2007
Let Friedman-Keynes deliver: Economic Times, 8th September 2007
Keynes did not believe that laissez faire economics could deliver adequately, while Friedman did. Keynes had a good role chalked out for the government while Friedman found it meddlesome and ineffective. Keynes preferred fiscal over monetary policy especially when there was a liquidity trap while Friedman relied on monetary policy. Friedman spoke of a long run rate of unemployment in which monetary policy could do nothing, while Keynes believed that in the long run we are all dead. Which of these two economists should one follow? Most central bankers today seem to believe that you can control the economy through cogent interest rates management. The focus is on inflation control and it is believed that interest rates can be used to either expand or contract credit growth and hence money supply. And barring oil prices, inflation at the global level is viewed as a monetary phenomenon a la Friedman. This conclusion has been independently arrived at by them based on their own domestic circumstances. Does this mean the end of Keynesian economics? This is interesting because the economics of Keynes has been the driving factor for several decades now where governments have used budgetary deficits to drive their economies. But, today deficits are not encouraged and even the Indian government is committed to fiscal responsibility. It fits in well with the modern tenets of globalisation wherein countries are covertly committed to free markets and less government interference in economic activity. Growth is spurred by lowering interest rates, which even Friedman would have admitted was effective in the short run though never in the long run. Now, Keynes had his theories right at times of economic distress when pump priming worked. It now appears that when economies are on a downswing, there will be a preference for the Keynesian prescription as it is the only way out from a low equilibrium trap. A clear case is Japan where a recession, on more than one occasion has made monetary policy impotent, due to the existence of a ‘liquidity trap’ where increase in money supply is ineffective as excess cash is only hoarded and not spent. The solution is to go back to Keynes and run deficits to induce demand-led growth measures, which worked reasonably well. In India too before we were on the 8% growth path, we did pursue discretionary monetary policies to induce growth through accommodative measures such as low interest rates and banking preemptions. The story becomes different when economies are on the upswing. At this stage, growth does not matter or rather becomes a concern because of prospective overheating. Governments are quick to advise their monetary authorities to apply the brakes because high inflation is possible, and could be politically destabilising. Interest rates are then increased until such time that a slowdown is engineered. The idea is to make credit expensive which lessens the impact of excess demand forces. So it is a case of monetarism taking over from demand-led strategies. Some curious conclusions can be drawn from these patterns observed both inter-temporally and inter-spatially. The first is that it is essential to identify the part of the business cycle that we are traversing for deciding on the economic doctrine as the remedies address specific conditions. The second suggests that developing countries should typically persevere with Keynesian economics where growth is low and deserves a big push. The developed countries could fall back on monetarism on the upward cycle but revert to Keynes in case of a downswing. But, when any country embarks on high growth through demand-led strategies, inflation would tend to be high and a 5-10% range should not be alarming. This is really a tradeoff which we should be prepared for because we were uncomfortable with a 6% inflation rate last year even as growth had crossed the 9% mark. The third ideological issue raised is whether or not deficits are good. Presently, fiscal deficits are not encouraged which makes implementing demand-driven policies that much more difficult. This is critical for developing countries as they would be at a disadvantage in the global financial markets when high fiscal deficits invariably lead to lower sovereign credit ratings. There is evidently need to move away from this mindset and make judicious use of fiscal deficits when warranted. The clues provided here are that it is not possible to be a monetarist or Keynesian all the time. The circumstances need to be examined before adopting an approach. Economic theory says that if there are two objectives, i.e., economic growth and price stability, then it is essential to use two instruments, in which case interest rates and fiscal policy are both pertinent. Fiscal policy is important in countries like India where distribution is critical as also for private sector incentives in the form of tax related concessions. Monetary policy combats inflation directly and can also drive growth. Therefore, we need both Keynes and Friedman today.
What drives commodity prices: Financial Express 8th September 2008
Commodity cycles are known to appear every 25-30 years. Looking around, and at the way commodity prices have been moving in the last year, the question that arises is how long this cycle will last. Normally, as long as there are excess supplies in the market, prices tend to get tempered down. But, given the global economy’s growth, oversupply indications could very well be only temporary occurrences in the midst of a longer phase of excess demand conditions in a cycle of increased amplitude.
Prima facie, it appears that with the world economy growing at nearly 5% per annum, and new nations joining the high-growth bandwagon, the boom has to continue for long. This is the view held by experts based on fundamentals as they exist today and the factors in operation over the next decade that would drive trends forth.
Commodities can be classified into precious metals, non-precious metals, energy and agricultural products. It is widely believed that all these segments would be guided primarily by the growth process as well as critical changes taking place in the political arena and the adaptations being made by society to them.
Gold, the leader in the precious metals segment, has its price determined by two factors. There is a demand side factor, where demand is rising at a steady rate with the supply being more or less limited (with fewer new explorations). Though there is the possibility of central banks releasing gold reserves into the system, this is unlikely in the foreseeable future in significant quantities. The other factor influencing the price of gold would be the US dollar rate. There is a high correlation between the price of gold and that of the dollar—estimated at around 0.95—and this has been breached only twice in the last decade and a half. The stronger the dollar, the lower is the demand for gold, seen as a store-of-value substitute. But the dollar is weakening against the euro. This is so because of the large current account deficit of the US, estimated at around $850 billion now and nearing 7% of its GDP. A correction involving a sharp dollar fall appears distant, and the euro zone economies would resist such an event that would weaken their export competitiveness. Yet, one can expect the dollar to weaken, which would impact gold.
Prices of other metals such as steel, copper, aluminum, zinc and lead are contingent on usage demand on account of commercial activity and the pace of industrialisation. Emerging markets such as Russia, India and China, as well as Brazil, Chile and Argentina, have embarked on a growth path that has industrialisation as the driving force. This, alongwith urbanisation, which are the centrepieces of this growth doctrine, also have infrastructure as a priority on the development agenda. This would support metal prices over the next decade or so. There is also an investment backlog across most commodity subsectors after over 20 years of low and range-bound commodity prices. High prices are needed to attract more investment in these commodities.
Energy prices will be driven by ever-increasing demand and the response of producers. Demand per se would take the same incline as the economy. This means robust demand over the decade, with only a few aberrations coming in the form of occasional growth slowdowns. Note that central banks today are quite reluctant to allow recessions and are willing to step in with lower interest rates.
The bulk of energy supplies would have to come from Opec and other nations, and this makes for some uncertainty. The crisis in West Asia is unlikely to be resolved quickly, which raises the risk of supply shocks. The curious thing here is that supply at the moment is not really a problem, as reserves exist. But the willingness of suppliers to invest in output capacity is hard to determine.
Meanwhile, the use of alternative fuels and other energy sources is slowly catching on, and its proliferation would mean moderation in the demand for oil, which may put pressure on Opec to hold prices. Therefore, while in the short-run prices would tend to remain firm, once the switchover trend towards alternatives crosses a threshold, it would have a moderating effect on conditions in the international energy market.
Agriculture remains vulnerable to the vagaries of nature, and it was observed globally that a shortfall in prices of wheat and corn in 2006 has increased prices across all countries, thus making it a global concern. Add to this the fact that there would be considerable diversion of production of corn and sugarcane for the production of ethanol, a replacement fluid for crude oil, and one senses upward pressure on prices here too. Production will have to increase substantially to eschew this pressure, a possibility which cannot be ruled out. The optimism would be expected to continue until such time as these changes materialise.
Given these tendencies in the market, it appears that the bull run is here to stay in commodities, and while there could be deviations in the short run, it is more or less an unequivocal case in the longer run—at least for a decade.
Prima facie, it appears that with the world economy growing at nearly 5% per annum, and new nations joining the high-growth bandwagon, the boom has to continue for long. This is the view held by experts based on fundamentals as they exist today and the factors in operation over the next decade that would drive trends forth.
Commodities can be classified into precious metals, non-precious metals, energy and agricultural products. It is widely believed that all these segments would be guided primarily by the growth process as well as critical changes taking place in the political arena and the adaptations being made by society to them.
Gold, the leader in the precious metals segment, has its price determined by two factors. There is a demand side factor, where demand is rising at a steady rate with the supply being more or less limited (with fewer new explorations). Though there is the possibility of central banks releasing gold reserves into the system, this is unlikely in the foreseeable future in significant quantities. The other factor influencing the price of gold would be the US dollar rate. There is a high correlation between the price of gold and that of the dollar—estimated at around 0.95—and this has been breached only twice in the last decade and a half. The stronger the dollar, the lower is the demand for gold, seen as a store-of-value substitute. But the dollar is weakening against the euro. This is so because of the large current account deficit of the US, estimated at around $850 billion now and nearing 7% of its GDP. A correction involving a sharp dollar fall appears distant, and the euro zone economies would resist such an event that would weaken their export competitiveness. Yet, one can expect the dollar to weaken, which would impact gold.
Prices of other metals such as steel, copper, aluminum, zinc and lead are contingent on usage demand on account of commercial activity and the pace of industrialisation. Emerging markets such as Russia, India and China, as well as Brazil, Chile and Argentina, have embarked on a growth path that has industrialisation as the driving force. This, alongwith urbanisation, which are the centrepieces of this growth doctrine, also have infrastructure as a priority on the development agenda. This would support metal prices over the next decade or so. There is also an investment backlog across most commodity subsectors after over 20 years of low and range-bound commodity prices. High prices are needed to attract more investment in these commodities.
Energy prices will be driven by ever-increasing demand and the response of producers. Demand per se would take the same incline as the economy. This means robust demand over the decade, with only a few aberrations coming in the form of occasional growth slowdowns. Note that central banks today are quite reluctant to allow recessions and are willing to step in with lower interest rates.
The bulk of energy supplies would have to come from Opec and other nations, and this makes for some uncertainty. The crisis in West Asia is unlikely to be resolved quickly, which raises the risk of supply shocks. The curious thing here is that supply at the moment is not really a problem, as reserves exist. But the willingness of suppliers to invest in output capacity is hard to determine.
Meanwhile, the use of alternative fuels and other energy sources is slowly catching on, and its proliferation would mean moderation in the demand for oil, which may put pressure on Opec to hold prices. Therefore, while in the short-run prices would tend to remain firm, once the switchover trend towards alternatives crosses a threshold, it would have a moderating effect on conditions in the international energy market.
Agriculture remains vulnerable to the vagaries of nature, and it was observed globally that a shortfall in prices of wheat and corn in 2006 has increased prices across all countries, thus making it a global concern. Add to this the fact that there would be considerable diversion of production of corn and sugarcane for the production of ethanol, a replacement fluid for crude oil, and one senses upward pressure on prices here too. Production will have to increase substantially to eschew this pressure, a possibility which cannot be ruled out. The optimism would be expected to continue until such time as these changes materialise.
Given these tendencies in the market, it appears that the bull run is here to stay in commodities, and while there could be deviations in the short run, it is more or less an unequivocal case in the longer run—at least for a decade.
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