Valley Voice Newspaper

By John Lindt

Diesel fuel is down this week to under $4 a gallon after reaching $5 in July, providing a 20 percent break on costs earlier this summer of moving just about everything we use daily.

It's not just truck drivers who are celebrating. The drop comes on a precipitous fall in the price of oil – down by a third ($145) since mid-July to well below $100 a barrel this week.

Neither hurricanes nor threats of blown pipelines have stalled the drop in the price of oil that most of the year almost choked the life out of the U.S. economy before that oil price bubble burst. What is clear now is that the bubble burst for other commodities at the same time.

While there was no dramatic increase in drilling or other major supply boost, the speculative fever that drove the price run up in many markets eased in July sending the future market among a score of commodities down in a similar chart pattern.
That high oil price had spread across the economy not just for motorists and airlines, but higher costs in basic needs like food production facing higher input costs - fertilizer, fuel for trucks, tractors and pumps and of course, shipping costs. Hard hit was corn – used to make many food products, and the key animal feed along with use for ethanol fuel blended with gasoline.

Corn now is down about 30 percent from a high in July – the same time frame as oil's drop. The tandem drop in those two commodities has been mirrored by an even steeper fall in natural gas prices – now half the price it was selling for back in early July. Natural gas is a key input for electricity prices (and fertilizer) that have been falling in the past two months as well to $68 from a high of $115mmBTU. It is also the main gas used to heat our homes as well.

Falling electricity prices hit home for every American business and household. Earlier this year, utilities had vowed they would soon need to raise power prices in California and around the nation because of soaring costs. Now, with the change in the marketplace, that may be unlikely.

Consumer Prices Down
for First Time in Two Years

The turnaround in these key commodity prices have translated into the first drop in consumer prices in two years, the Labor Department reported this week.
The drop in oil, corn and natural gas may have come just in time to allow key market players in California and the Central Valley to look forward to a profit for the first time in recent months, including the huge dairy industry, the big beef cattle, poultry and hog sectors which are all welcoming a lower cost of feed – the largest factor in their businesses. Most importantly, it will help provide a way to lower cost of their product to consumers. That will help to increase future demand.

The lower price of corn helps diffuse the issue of food vs. fuel that has divided farm interests in this country, based on the fear that ethanol demand was the main reason corn prices were so high worldwide. Turns out oil and speculation have much more to do with it.

Now consumers are paying less for that hamburger and steak (cattle prices are down 10 percent since July) and less at the gas station to pump gasoline and ethanol in their tank.

Consumers who are paying less for gas and food will soon be ready to return to local restaurants where they may actually be able to afford a steak dinner because of the lower cost and because they have more jingle left in their pocket when they don't drop it all at the pump. In a word, the downdraft in prices could provide a platform for consumer spending.

The drop in oil is helping to spur lower ticket prices for airlines and may mean some relief for the hard hit hospitality and tourism business. Transportation companies like FedEx and UPS are saying now that lower fuel costs will allow them to make a profit. Aviation fuel costs, which can amount to 50 percent of the expense of flying an airline, could help small carriers like Great Lakes Airlines that serves Visalia – to survive.

The decline in farm commodity prices doesn't end with corn. Soybeans and other key feed ingredients have fallen in the futures market by about 25 percent since July. Wheat too has declined in the same range. As these prices fall from lofty unsustainable levels, other important commodities have headed in the same direction, including aluminum and copper by similar percentages. The widely watched CRB index for commodities has dropped about 20 percent since early July.

A report released earlier this month said index traders poured $60 billion into these commodities from January to May, and when Congress held hearings that could tighten the screws on these transactions, they pulled out $39 billion.

It seems the house of cards was built on oil speculation and the house teetered and collapsed in July taking many other speculative commodity plays with it.
Amazingly, interest rates follow the same chart pattern as many of those commodities, and now with the takeover of the largest generators of mortgage in the U.S. – Freddie Mac and Fannie Mae – we are also looking at lower interest rates that people can afford. As you can see from this chart, 30-year mortgage rates have been following the same oil price, corn price and commodity price trend – down as inflation worries, driven by sky high oil – will now decrease.

There is concern that lower oil prices, if the trend continues, will hurt the alternate energy business in the U.S. as we try to wean ourselves off oil. These industries are dependent on government regulation to support them through mandates and credits. With global warming and concern over our security – this government support is not going to go away. Neither is the auto industry likely to head back to the past in concentrating its efforts on the bling - cranking out fuel-inefficient vehicles.

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