Volatility cuts both ways

Lest we be lulled into the assumption that commodity prices are on a one-way trip to infinity:

In just the last couple weeks corn prices have fallen from nearly $8/bushel to about $6.15. All of that is due to a rather small amount of information about the progress of this year's crop. Yes, there were reports of flooding and late plantings, but that kind of thing rarely has much effect on the overall crop production. The late plantings just set up even more volatility going forward, since the plants will be susceptible to extreme heat in July and August.

That's Michael Roberts, who concludes that

this volatility does provide a teachable moment: it shows how sensitive prices are to small quantity changes.

True, but I think we are collectively more attuned to the downside factors (climate change, growing demand) than the potential upsides (e.g., a sudden removal of biofuels mandates, or a restoration over several years of typical buffer stock levels). A 25% fall in a matter of weeks is huge, and a reminder that high food prices and food price volatility are not the same thing (a huge pet peeve of mine).

This can also be true for seemingly exhaustible physical resources, as yesterday's announced discovery of "vast deposits of rare earth metals" on small plots of Pacific Ocean seabed show us.

estimated rare earths contained in the deposits amounted to 80 to 100 billion metric tons, compared to global reserves currently confirmed by the U.S. Geological Survey of just 110 million tonnes that have been found mainly in China, Russia and other former Soviet countries, and the United States.

(don't sleep on the B vs. M - that is 800-1,000x current confirmed reserves)

I am pondering a longer post on what this means for commodities as an asset class (namely that over decades, they will not provide attractive real returns, although they may have some value as a hedge against inflation).