Summer Grain Markets: There Are a Thousand Factors, Pick Your Poison

VolatilityThis past week we saw President Barack Obama storm out of the meeting with other congressional leaders over negotiations regarding the US debt ceiling.  President Obama was obviously animated in the charged US political atmosphere between Democrats and Republicans.  He wants an agreement to increase the US debt ceiling by August 2nd or potentially the US could partially default on some of its obligations.

It is the classic American cat and mouse game between a Democratic president and a strong Republican Congress.  So far there has been no movement, both sides polarized by what needs to be done with no common ground on how to get there.  The specter of American default is insane.  So agreement will happen but it might be kind of messy.   Meanwhile, US unemployment is at 9.2%, the housing market is terrible and the province of Alberta added more jobs last month then the whole United States.

Pinch me and wake me up. This does not build confidence in our economic future.  Any little nuance within each of these economic zones would send the global economy tumbling.  If not that, a few hiccups could affect Canadian banks.  I want none of it, but increasingly simply massaging this debt issue, as something that will be dealt with later cannot be.  It seems like the Europeans and Americans continually want to avoid the problem and are unwilling to make the hard choices.

Huge trillion dollars spending cuts are coming in the United States and it will not be pleasant.  However, even a big country like the United States cannot continue to spend uncontrollably into perpetuity.  The bill finally comes in.

From a distance this seems like such noise. And it is one thing to see the sovereign debt concerns coming out of Europe and the jitters they cause in the grain market.  I think we can all understand how European default could freeze up capital and curtail grain demand.  However, when our next-door neighbor, the largest buyer of Canadian agricultural produce in the world having a hard time paying their bills, that gets my attention.  If the United States for whatever reason cannot pay some of its bills on August 2nd, the US dollar will sink like a stone.  In normal times that would boost ag commodity prices.  However, an American default would not be normal times.  Simply put, our American friends have to get this one done.  It’s getting too close to monetary and fiscal insanity.

To make markets more nervous we also had comments from US Federal Reserve chairman Ben Bernanke this past week along with another USDA supply and demand report.  In fact the rumors on Tuesday night after the USDA had released its supply and demand report that the Federal Reserve was thinking of adding a QE3 to their repertoire.  This sent markets up very highly on Wednesday as the US dollar tanked with the specter of more printed money.  However, on Thursday Ben Bernanke came out and said that may not necessarily be the case.  The market reversed and then quickly found better ground on concerns of hot weather reaching into next week.

If that wasn’t enough excitement for the market, the July 12 USDA report chimed in. It sent a bit of a bullish tone back into the corn market after the 370 Million-corn bushels surprise it foisted on the market only two weeks ago on June 3oth.  On July 12th USDA released its new crop corn production figure at 13.470 Billion bushels of corn, but at the same time increased usage of ethanol, feed and exports.  The stocks to use ratio on new crop corn is 6.4%.  The old crop carry out was pegged at 880 million bushels, which was much lower than trade expectations.  After the surprise of June 30th, the increased demand numbers were welcome.

The USDA report would have been enough news for grain prices over the last week.  However when you add all the other variables into the mix, like Ben Bernanke, the US debt ceiling and the report, it made for quite a volatile week.  Then late in the week some weather models were saying that the heat ridging would sustain itself in the western Corn Belt right at pollination time.  I guess when it rains it pours.  Another outlier from the annals of chaos theory might as well be thrown on the fire.  Volatility reigns.

Of course nobody knows what is going to happen.  However, it’s almost like the third quarter of an NFL game with the home team making a comeback.  Despite some bearish problems in June, grain demand remains surprisingly resilient at these price levels.  There are a thousand factors to consider.  As farmers in 2011, that is our challenge.  Pick your poison.