The Nature of 2011/12 Markets: Violent Volatility Ahead

Violent Volitilty 2Has the smoke cleared yet? I think you know what I mean.  Like a festering sore thumb global economic events continue to sabotage any particular bullishness we have in our grain markets.  Today, it was one more of those days where world stock markets were down significantly in Asia Europe and North America as money frantically looked to find a safe haven.  Where one time investing in commodities was seen as a hedge against inflation, it seems now nobody knows where to go.  Prices may be falling but how do you put an end to that.  Grain markets were down heavily on the gloomy economic news.

For the record the nearby corn futures are down about $1.49, nearby soybean futures are down a $1.82 and nearby SRW wheat futures are down a $1.72 since August 29th.  It just gives you a little bit of heartburn as many of us were coming off the recently released September USDA report which essentially said the coast was clear for buoyant prices into the fall.  Yes, European debt concerns are like that sore that never heals but I think we were all hoping somehow we would find a way to deal with that.  Yes, the world has to eat but the events of the last 3 weeks and especially today should show us how important speculative demand is in our greater grain markets.

Violent volatility is now a constant.  Think of it this way.  Long-term index fund investment in commodities has gone from $6 billion to $412 billion over the last 10 years.  Hedge funds had $34 billion in commodities ten years ago, but it’s presently near $246 billion.  The funds take no prisoners.  They only want what they want and sometimes it only matters about the high and low of the day.  They’ve been getting out of grains at a huge pace.  Today, it was like a trap door underneath them.

It is never a good day when stuff happens like this.  I have come to have great respect for the grain speculators in our market.  Without them, we would not have the opportunity to sell corn for $7.25 like we did over the past month in Ontario.  I have come to believe that the liquidity that they add to the market is far greater than any uncertainty they add to it.  You could almost hear the chatter in farm country today against the evil speculators as markets went south.  Key is to understand that this is a normal part of farming in 2011.  Things go up and down in agriculture and this was just a downtime.

It also begs a question does supply and demand matter anymore?  We know that the world is running out of corn.  If the market does not ration demand then the last kernel will come down the pipe and we’ll be out.  Even the September USDA crop report said we are still using more corn that we will produce this year.  So what happens, the corn market drops $1.49.  That’s not rationing demand, in fact it will build demand.  It’s an obvious example of how our grain market does not trade on supply and demand alone.  Sometimes like the last 10 days to 3 weeks noncommercial demand has been everything.  Are outside markets have certainly contributed to the “risk on” environment in the grains.

Fixing our economic system will not be fast.  In fact you could say that many of our economic policymakers are running out of bullets.  That was for sure when last week the US Federal Reserve did a “twist” by buying 400 billion dollars of longer dated treasuries and selling the same amount of short-term debt by June.  Interest rates are close to 0 now and this would make them even cheaper.  In my mind it was like in the old wild West where guys ran out of bullets and now they were throwing the gun at each other.

In Europe it is much more complicated.  European stock exchanges were down partly because we have this festering problem of Greece.  Essentially you have one common currency, the Euro, and several fiscal policies that don’t mesh together.  European banks have exposure to some of these sovereign nations, which in turn have exposure in North American banks.  It’s all tied together and hence the problems in our markets.  Add China’s hiccup in their manufacturing data today and it just made things worse.

Do I know what will happen next?  No, of course not.  However, I do not expect global economic health to return soon, in fact it may take years.  Some type of financial, fiscal and monetary fracture has to take place in Europe.  In the United States people have to start spending again.  We need an expectation of inflation.  Right now everybody has their hand on their wallet.

That’s a problem when you want everybody to buy corn, soybeans and wheat.  You can bet the speculative funds won’t forget that trap door too soon either.  Expect choppy markets with violent volatility ahead.  Its the nature of markets in 2011.  It’s never going back to the way it used to be.