What Soybeans Say About Inflation

It was at one of Harry’s and Rodney’s Demographics School conferences that I first saw them speak in public. Naturally I had read several of their books, but I’d wanted to see the show in person.

Last week I wrote about gas prices. By looking at a ratio comparison of RBOB Gasoline Futures versus U.S. Treasury bonds, I showed you how we could see inflationary pressures building in the energy complex.

But maybe you already knew that. After all, you likely fill up your tank every week or so with the grimacing pain of having to watch prices tick higher and higher.

You also make a weekly trip to the grocery store. And that endeavor isn’t any cheaper either!

So today, let’s look at a relative strength comparison of soybean futures versus U.S. Treasury bonds. This will give us a gauge of food price inflation. Take a look…

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Soybean prices are in the numerator in this equation (soybeans/bonds), so a rising ratio line indicates soybean prices have risen faster than bond prices. And this is indicative of inflation.

You’ll see the ratio turnrned higher at the very start of 2009. Soybeans had a record run-up in 2009 and 2010, gaining 133% in these two years.

Since January 2011, however, soybean prices have appreciated just 13%. Meanwhile, Treasury bonds have risen 25% as yields dropped lower. This is indicative of disinflation (that is weakening inflation but not yet deflation).

The ratio line is forming a triangle patternrn that shows the lack of a clear trend. In definitive uptrends, you’ll see higher highs and higher lows. In strong downtrends, lower highs and lower lows are common.

Yet a triangle patternrn shows consolidation, with lower highs and higher lows. As this patternrn compresses, sideways movement overtakes any clear trend. Eventually there will be a breakout, either higher or lower. When this happens, we’ll get a clear signal on the inflationary/disinflationary pressures winning out in the agricultural markets.

I’m keeping a close eye on this inter-market relationship. Stay tuned.