Exorcising the World Economy: An Economic Tsunami We Don’t Need

VolatilityJPEGI loaded up the last few thousand bushels of soybeans this past week.  They had been sitting in my bin as a hedge against higher prices and my own lack of labor resources.  So I cleaned them up this past week and delivered them to a processor who ships them to Asia.  In about 3 weeks somebody in East Asia will be sitting down and enjoying those soybeans that have sat in my bin since October.  I wouldn’t want to eat them, but I hope they enjoy them.

Between loading soybeans this past week I was plowing wheat stubble, the 1st step in preparing my stale seedbed for corn in 2012.  So I spent long hours inside a tractor listening to my satellite radio.  Hour after hour was spent listening to business news mostly about the equity markets.  So when Asian, European and North American markets tanked today and gold spiked to record levels I was getting minute by minute updates.  Bloomberg News makes it so real you think the apocalypse is almost upon you.  One thing I knew as I turned over the soil was the problems in equity markets would surely be negative for the grains.

Of course as farmers we usually don’t have too much exposure to the equities market.  However, in 2011 whether you have stock or not is immaterial.  So much global currency is caught up in different financial products that include commodities, equities and who knows what else.  So when one market tanks, it usually affects the others very quickly.  The problem today stems from the same “bad debt”,” bad economy” economic equation.  It just seems like there’s something rotten in the economy and it just keeps coming back to the surface.

It kind of reminds me of a time a few years ago when a colleague of mine was unloading soybeans from his bin.  He had put the soybeans into the bin in good conditions but as he cored the bin for whatever reason, moldy soybeans came out of the auger.  He was horrified and for the next week he worked the bin to try and exorcise a moldy layer of soybeans out of it.  At the end of the day he was successful, salvaging the good soybeans from the bad.

I thought of him today when equity markets were tanking around the world and analyst after analyst on Bloomberg News kept reassuring us this was an aberration.  I kept hearing people that obviously didn’t know calmly reassure their interviewers that the global economy would eventually be fine.  I found it a bit like a fairytale.  I say that because sometimes I am asked to comment on these issues and I know how easy it is to say all the right things.  The bottom line is nobody really knows how we are going to deal with these European debt issues and whether the United States is going to see sustained, consistent economic growth into the future.  Simply put, just like those soybeans, there is something rotten incubating within the world economy and it doesn’t want to go away soon.

What is rotten is sovereign debt levels which are being financed by many European banks.  Much of this debt has been refinanced outward across the global economic system.  Despite our tendencies to believe it will all just go away, it isn’t.  It’s a problem and for the life of me, I don’t know how you cover it up anymore.

Adding to the poisonous news of the day was a report from the CBC that the rating agency Standard & Poor’s was being investigated by the US Justice Department for the ratings it gave to dozens of mortgage back securities in the lead up to the financial crisis of 2008.  You might remember that Standard & Poor’s had downgraded US credit worthiness earlier this month sending equity markets spiraling.  That same rating agency had also rated mortgage-backed securities AAA, when many of them were reduced to dust after the Lehman Brothers meltdown in 2008.  It might be coincidence that they’re being investigated now but it makes sense to me.  This system is riddled with inconsistencies and conflicts of interest.  Having trillions of dollars of wealth disappear based on Standard & Poor’s ethics in my small mind is a real stretch.

For farmers raising crops and selling grain, all of this is relevant.  At the same time we’ve obviously got some big problems with grain fundamentals as we move ahead.  The US corn crop is deteriorating and grains are holding their own despite the headwinds coming from the outside markets.  The question is how long can it continue?  At a certain point what’s rotten in this global economy has to be dealt with.  If it’s not, don’t be surprised if the grains can’t withstand the pressure.  A global economic Tsunami we don’t need.