Dear CIGAs;

This morning USDA released its end-of-season corn and soybean stock numbers as well as its January supply/demand numbers. They lowered the size of the 2007 corn crop while raising the usage dropping the ending stocks number much lower than anyone in the market had been looking for. Winter wheat seedings also came in lower than the market was anticipating given the high price of wheat.

The results were dramatic across the entire grain complex but especially for corn and also for new crop beans. Corn locked limit bid immediately for both old crop and new crop contracts on the open of pit trading while new crop soybeans soared 50 cents to lock limit bid while new crop wheat hit limit up and locked there. As I write this it appears the pool in corn is over 81,000 to buy at the limit for the front month alone

The reason I call this to your attention is because the grains comprise a large section of the various commodity indices which are benchmarks used as proxies for the commodity world by investment funds. The CCI in particular, Continuous Commodity Index, which I introduced to you a couple of years ago made yet another multi-decade high and it not far from the 500 level, something which truth be told, I never expected to see in my lifetime.

What is happening in the food sector literally boggles my mind. Food inflation is raging out of control mainly because the conditions that brought forth these high grain prices are not going to disappear anytime soon. Both old crop and new crop corn and bean prices are trading at record highs while even new crop wheat prices still remain at historically lofty levels. These grains are not only ingredients in so much of what we consume but they also constitute the greatest input cost to livestock and poultry producers. Inefficient hog producers are not going to survive as they are currently losing as much as $40/head on every hog they sell. Chicken producers are experiencing financial pain the likes of which they have never seen. What do you think is going to happen to the price of pork and chicken and even beef further on down the road as a result of this? Correct – they will have to rise or there will be no incentive for those producers to continue in the business. We have entered what appears to be a vicious spiral. At some point we will stabilize but it will absolutely and most assuredly be at price levels that allow for a profit to be made by those in the industry and that is higher.

I might add that is what happens when someone comes up with the ingenious idea that it is a good thing to burn up our food supply in our gas tanks! I am happy for the long suffering corn and soybean producers who have struggled with artificially low prices for their products for years but the truth be told, their gain is the livestock and poultry sectors’ pain, not to mention the dairy industry.

Make no mistake about it – this food inflation is going to have serious implications for the US consumer. “Sticker shock” at the grocery store check-out is going to become the new cultural phenomenon. Do you remember when you could buy a dozen eggs for $0.50? I do. Well, the days are coming when we will look back at $3.00/gallon milk with the same nostalgia.

If you think this is not bad enough wait until the politicians start getting involved in their attempts to once again appear compassionate and caring.

None of this is being lost on the gold market which teased us today by finally besting the $900 level by 10 cents before setting back. Think about what you are witnessing here and remember it well. It will be your story to your children and grandchildren.

Dan