Opening Position
June 2008
Understanding
the mechanics of the market is key to becoming a successful trader. We've
all heard that often enough, and for good reason: It's true. Once you understand
that all markets are related and how the supply/demand relationship affects
prices, you really do have an upper hand. And really, as unfortunate as it
may be, if you look at the food crisis the world is currently facing, you
can see the effects of supply and demand at work. The main problem behind
the increase in food prices is the rise in the price of crude oil, which
is a phenomenon we are confronted with at every turn.
Every summer, the price of gasoline goes up. But when the situation
gets so bad that the cost of staples such as rice has gone up like never
before, you know it has spiraled out of control. We're already seeing the
negative social effect this is having on developing countries where rice
consumption is high, and it'll hit the developed nations as well. Right now,
in the US, major retailers such as Wal-Mart have imposed restrictions on
the number of bags of rice a family can buy.
The last time
there was a global food crisis was in 1970. At that time, the situation was
rectified with an increase in production, which eased the supply squeeze.
We are probably not going to see that this time around, mainly because all
the input costs -- energy, cost of land, seed, and fertilizer -- have risen
considerably. So essentially what has happened is that the equilibrium between
supply and demand has been thrown off.
We have a supply squeeze that will be a challenge to repair. With rising
costs, increased demand, and let's not forget the depletion of resources,
it is likely that we are going to see a serious global crisis. So what can
be done to fix this? I'll leave that to the experts, but you can bet that
I'll be keeping a close watch on all those decisions made by policy makers.
It will be interesting to see how this gets resolved.
We all want to see things come back to some sort of normal level without a major social catastrophe. These are indeed trying times.
Jayanthi Gopalakrishnan,
Editor
Originally published in the June 2008 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2008, Technical Analysis, Inc.
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