Getting Those Noncommercial Speculators Back and Waiting for Godot

Grain GodotLast week I asked if the smoke had cleared yet.  However, clearly it has not as agricultural commodity markets continue to try and find bottom after widespread noncommercial fund liquidation spread like wildfire through the market.  Yes volatility is now a constant.  With the world’s money trying to find a home that certainly wasn’t in commodity markets over the last few weeks.

Trying to decipher what happened is always a bit like a Monday morning quarterback.  I always like to look at the tangible results of anything.  So when you think that corn lost $1,44 and soybeans lost $2.37 and wheat $1.61 since August 29 it’s a bit of a showstopper.  Yes our friends in the noncommercial speculative demand sector add all kinds of liquidity, but when they get out, they typically don’t hold on to the sides.

There are all kinds of critics of this volatility in Canadian farm country.  However, I am not one of them as I’ve said many times that our speculator friends give us marketing opportunities that the big grain companies would never afford us.  It also seems to me that when speculators get out of the market in droves like over the last few weeks the market goes down much faster than it ever goes up.  It’s the nature of the beast.  We just should chalk this up to experience for next time.

The problem is not everybody sees it this way.  Increasingly, the world looks at their problems through a narrow lens onto our commodity markets.  You don’t have to look to deeply over the past few months to see some our political leaders pointing the finger at commodity speculators and their role in food price increases.  I don’t really subscribe to that type of thinking, but it is everywhere.  It makes me think that we should expect at some point, speculators losing the game and being regulated out of business.  Nervous politicians like to point their finger on somebody and nameless commodity speculators certainly don’t have much of a political constituency.

For instance there are those that feel that the Arab spring was partly triggered by rises in global food prices.  They point to the market deregulation under the Commodity Futures Modernization Act of 2000, the same legislation that introduced financial derivatives like credit default swaps into our common culture.  This led to great investment in commodity markets, which usually took the form of ETF’s and Index funds.  I think you know the rest of the story.  The “Global High Food Price” lobby has their crosshairs clearly on commodity speculators.

I don’t agree with this but it is surely gaining traction around the world.  I expect if it continues that there will be some type of new regulation of world commodity markets, which will reduce the amount of capital that can be invested.  At the end of the day, I think this will be a large negative to North American agriculture.  If we don’t have liquidity, there is more room for big grain companies to engage in oligopolistic market behavior.  That’s a fancy way of saying “chicanery”.

I find it strange saying that.  Essentially I’m saying that we need the evil speculators to keep the big evil grain players from reducing competition.  That takes me back to 1990 when I was called to Ottawa to speak as an expert witness to the House of Commons standing committee on Agriculture regarding price manipulation at the Chicago Board of Trade.  At that time I was talking about the Italian soybean buyer Ferruzzi and the forced liquidation of their positions.

That is a long story to recount but if commodity markets had the same amount of noncommercial capital invested into them then versus what they have today, it may not have happened.  There may have been enough liquidity in the market where nobody could corner it.  Of course, back in those days you did not have volatility of almost $2 in corn over 4 weeks.  That was the price of corn.  So you can see how the world has changed and how our speculator friends add to the demand component in commodities.

It almost makes the fundamentals of grain supply and demand so yesterday.  Needless to say, the world is still running out of corn unless we ration demand and at these prices, I cannot see that happening.  So we move ahead, many of us hoping our speculator friends get back into this market.  However, they don’t have the emotional attachment to their agricultural commodities like many farmers do.  It’s all about the high and low of the day, and where the next opportunity is.  For the moment, that’s not in the grains.  However, someday our speculator friends will be back.  However, it might be like waiting for Godot.