Grain Markets, Evil Speculators, Libya and Louisville

Evil Speculators 500I have a good friend in Libya.  Of course I have been very concerned about him and his family.  Right at this moment I don’t know where he is or his condition.  I got an email earlier this week telling me he was okay—for now.  That, for now, has haunted me a bit all week.

As you all know I often muse about sucker punches coming in on some unexpected Tuesday, which really throw you.   It’s pretty clear, Egypt was one thing but the events taking place in Libya have thrown a big monkey wrench into world markets.  Its one thing to have a town square surrounded by army troops in Egypt versus a more rogue country with lots of oil, imploding before our very eyes.  Of course when the leader of that country is somebody like Moammar Quaddafi, who says he’s going to fight until he is a martyr, markets went from being nervous to be a bit panicky.  In fact the oil market has been on a tear ever since.

The North American price of oil jumped over $103 per barrel last Thursday amid all the turmoil in Libya.  Some analysts estimate that oil production has been cut by about 1 million barrels per day so far which is about half of Libya’s production.  There have been a myriad of production shutdowns.  There was even an instance of protesters attacking an oil installation run by Canadians, where the Canadians ran off into the Sahara desert.  The specter of $5 gasoline has become reality at least to many in the American media.  How that will impact the impending acreage war in North America as well as our fuel costs has certainly jumped to the forefront.

The grain markets reacted violently to the downside as noncommercial speculative positions saw an opportunity to park their truck in the energy sector.  For instance corn is about $.40 cheaper than it was a week ago.  Soybeans are about a $1.20 cheaper than they were about two weeks ago.  Wheat is in the same type of atmosphere.  It was almost the classic explanation of noncommercial speculative trade.  The people who add tremendous volatility to the market saw their opportunity to go somewhere better and they went.  They simply were volatile.  It’s always fun when it goes up, not so much fun when it goes down.

Of course it really isn’t about fun.  There are real dollars per acre being lost and gained here.  However, I must say when it comes to speculation in the grain market, I had a little fun last week.  On the way to the Louisville Farm show I actually stopped off and had lunch with David Stendahl, a CTA (Commodity Trading Advisor) who I got to know through Twitter.  David had commented on some of my articles posted on Twitter and I had commented about some of his.  It became obvious to me that he was one of these “evil speculators” (I’m just kidding) and I could learn a lot from him.  So I made arrangements on my way to Louisville to check in with David.

Our lunch just north of Cincinnati was very cordial.  In fact in many ways it is a credit to twitter because even though we had never met in person, it was almost like we knew each other because we commented on so much of our work together.  Of course with a speculator sitting beside me I wanted to ask him the question about the noncommercial speculative trade at the CME causing greater volatility.  David was a bit reticent to take credit for all of that, he did say when the market is going up, people like him may make it go faster and when it goes down the same thing happens.  So that is volatility, it is what it is.  David went on to tell me about his world of “managed futures” and how he develops automated “systems” to trade in managed futures as part of a greater investment portfolio.  For this farm boy from southwestern Ontario who actually produces commodities, it was a fascinating look into a world we generally just criticize from afar.

So if you grow corn and wheat and soybeans in 2011, yes, it’s about tight grain fundamentals but it’s also about “managed futures” by CTA’s like David Stendahl and a whole host of other speculators and their assorted funds in the market.  Managed futures asset growth grew by 546% in the last decade.  Since 2007 the managed futures assets under management has grown 57%.  So what about those “evil speculators” affecting our grain markets?   Yes, they do have names and phone numbers.  It looks like to me they are just trying to make a living one automated trading system at a time.

If that’s evil, it’s evil.  Surely last week putting Libya into the mix made it a little bit more sinister.  Maybe this helps us understand the term ” volatility.”   Maybe, in 2011, we’ve seen nothing yet.