PFGBEST Energy Comment

CHICAGO - Oct 13/10 - SNS -- Following is the energy futures comment from PFGBEST Research.

Can Rising Commodity Prices Derail QE 2?

By Phil Flynn

Can Rising Commodity Prices Derail QE 2?

The odds of quantitative easing continues to go up almost as fast as corn prices as the Fed Minutes confirmed that the Fed is getting ready to run the printing presses. The FOMC is worried that, 'the recent and anticipated progress toward meeting the Committee's mandate of maximum employment and price stability to be unsatisfactory'. The Fed says that economic data had been mixed, with readings early in the period generally weaker than anticipated but the more recent data coming in on the strong side of expectations. So, 'in light of the considerable uncertainty about the current trajectory for the economy, some members saw merit in accumulating further information before reaching a decision about providing additional monetary stimulus' But that they would consider it appropriate to take action soon.'

How soon? While the Fed is talking about more purchases of securities, European Central Bank Governing Council member Axel Weber is talking about an exit stagy. He said that the European Central Bank should stop its bond purchase program while our Fed is talking about stepping it up thus creating the potential for a larger wedge between the Euro and the dollar and a continuing spike in commodity prices.

The Fed may want inflation but is anyone in the Fed or the EPA for that matter, concerned about the impact of higher grain prices. Obama's Environmental Protection Agency sure isn't. Despite the fact that US corn supplies are the tightest they have been in 15 years and the global demand for corn is rising, they are moving ahead on expanding their ethanol program. The Obama administration will grant a request from ethanol producers led by a lobby group 'Growth Energy' using the influence of General Wesley Clark to permit higher concentrations of the corn-based fuel additive in gasoline for vehicles made in 2007 and later. The EPA will allow refiners to blend as much as 15 percent ethanol into fuel, up from the current 10 percent. Now this decision was expected because of all of the political favors that the EPA can give out but did anyone stop to think that this was a good time considering the skyrocketing corn prices?

The last time corn came into tight supply it helped spark food riots. In Mexico corn is a staple of their diet and they are already fearing the impact of tighter supply and prices that are already over 45% higher than they were a year ago. Of course that means the price of other things like meat and milk and bread go up because of the competition for acres increases the costs of other grains. Could this spike in price thwart the efforts of the Fed to jump start our economy if prices continue to rise? Could we see a global backlash to the Fed's stimulative policies? Is this politics at its worst?

No, because politically motivated drilling moratorium may be worse than that. The drilling moratorium cost American jobs and slowed economic activity was really a political cover move by the Obama administration. The good news it has been lifted. White House Press secretary Robert Gibbs said, 'The process is coming to its natural end', which of course is right before the midterm elections. The Obama administration tried everything to make up for the fact that they were incompetent. According to their own investigation, suppressed information regarding the size of the spill actually slowed the response. They refused to let in foreign flagged ships that could have helped contain the spill. A last desperate attempt to look like they knew what they were doing cost the already struggling Gulf Coast even more jobs by an ill conceived and unwise deep water drilling moratorium.

PFGBEST Research Team

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