David Hightower, principal of commodity trading adviser Hartfield Management and editor of The Hightower Report newsletter, has dealt in commodities for more than 25 years. At the start of his career, prices in the agricultural commodities markets were dictated largely by what happened in a "500-mile circle around Decatur, Ill.," he says. "Now influences come from every corner of the world, and that's increased volatility." Contributing Editor Christopher Farrell reached Hightower in Chicago.
Is the agricultural commodity boom becoming a bubble?
The markets always run ahead of themselves, both on the upside and the downside. Do I think we are ahead of ourselves now? Yes. But we haven't seen prices go up enough to pay for the further development of high-powered seed technology, biofuel energy, and the like. Higher prices will attract investment money into other kinds of biofuels that don't rely on corn and other fuel—like jojoba, a weed that produces oil for biodiesel. It's poisonous. You can't eat it.
So you see agricultural prices staying high?
People are shocked at high prices, saying it's biofuels, but it's really demand. Some 2 billion people in India and China are demanding better food. You may see bubbles temporarily deflating, but it won't be the end of the boom. It could be a longer cycle than most people think. In the past, if there was a shortage or surplus it would be corrected in three to five years. There are complaints about speculators now, but this time price increases are largely driven by physical demand.
Let's stick with the bubble theme. How about oil?
We do have a bubble, but prices will stay at a high level. Investors worried about inflation have put a tremendous amount of money into oil in the last two months. Every time we see the dollar go down we see a rally in oil. If the dollar does better, oil could go down $15, and the stock market is likely to benefit from a $10 to $15 break in crude oil. That's the most I expect with the hurricane season, Nigerian production tensions, and demand from countries like China.
Do you expect the dollar to do better?
There was a bubble in the dollar on the downside. Now that the worst of the financial crisis is behind us, I think the dollar will stabilize.
Money is pouring into commodities through index funds that track major commodity indexes. Some say that's artificially driving up prices. What do you think?
The Commodity Futures Trading Commission called a meeting because some traditional commodity investors worried that the commodity index funds and speculative interests were causing prices to diverge from reality. According to attendees, the CFTC found [index funds] not having as big an impact as people expected. Will [the inflows] influence prices? Yes.
What's the next price shock?
We've had high feed costs, and many hog producers have reduced the size of their herds. Next year pork and beef prices will be the big topic. We need that protein supply. Prices will go a lot higher.
Maria Bartiromo, anchor of CNBC's Closing Bell, is off this week.