Grain Headwinds: MF Global, Europe and Increased Competition–Hither China

MF GlobalIt has been a tough week in the grains.  We have the usual suspects, that being Europe.  It seems that our European friends cannot get it together.  While Greece might be a problem, you only have to wait a few days and now it’s Italy.  Who knows, maybe tomorrow it will be France.  Every time there is a European jitter, which now seems to be almost on a daily basis, noncommercial money leaves the grains for better places.  It would be comical, but it is so dire.  I do not know how Europe is going to solve their debt issues.

The Europe thing continues to linger but there are other issues in the grains, which are festering like thorns in your side.  MF Global, the large brokerage firm, which went bankrupt on Halloween continues to serve as an example of what can go wrong in free markets that are supposedly regulated.  All of us have heard of MF Global in Canadian farm country, as they sponsored many commodity commentaries throughout our radio airwaves.  So after their bankruptcy we found out that about $650 million worth of customer’s money had gone missing.  Where did it go?  Well, nobody knows and now it would seem that the Commodity Futures Trading Commission and other regulators including the CME are sifting through the scorched chicanery trying to pick up the pieces.

There was even talk last week of the USDA delaying the November 9th crop report as many traders had open positions that could not be closed because of MF Global.  I understood the reason behind such thinking, because a major price move after the crop report would only add to the uncertainty of the integrity of the market.  The USDA crop report came and went and it would seem MF Global did not factor into much of the discourse regarding the report.

There was even a Canadian angle to the MF Global fiasco.  The CME group had accidentally transferred the Canadian accounts of MF Global with the US accounts as it struggled to free up investor holdings that had been frozen since the October 31 bankruptcy.  These Canadian accounts were transferred back to MF Global Canada.  Despite this, there is still some conjecture whether that was true or not.  The bankruptcy is a bankruptcy and the Canadian money is certainly in limbo.

How does this MF Global problem affect Canadian farm country? Simply put, it’s all about confidence.  As farmers sometimes we do not understand the totality of what goes on in our grain futures markets.  However, despite the high concentration of speculation in those markets, usually we feel they are free of fraud.  In other words, the markets are real.  The MF Global bankruptcy and the subsequent disappearance of $650 million undermine the sanctity of the price discovery process.  It’s like a serpent under the living room carpet and until they find the money, it’s going to stay there.

All of this overshadowed the November 9th USDA report.  USDA estimated that US corn production would come in at 12.3 billion bushels down about 1% from their forecast in October and last year.  This was based on 83.9 million acres to harvest with the yield at 146.7 bushels per acre.  This was the lowest yield per acre recorded all year from USDA, but still the 4th largest on record.

The soybean yield came in at 41.3 bushels, which was down slightly from last month and 2.2 bushels lower than last year.  I think the expectations within the trade were for slightly better production numbers, but it did not happen.  In most cases you would expect markets to respond positively to this USDA report, but outside markets seized the day.  With Europe imploding on negative headlines, grains have been lower all week.

In South America, planting progress has been ahead of normal.  This is a harbinger of things to come as their production continues to go up.  We are also finding increased competition from South American grains as well as Black sea grains in almost every port around the world.  Add the softening demand from non-commercials leaving the grains sector, makes for little hay for the Bulls to eat.

It makes you wonder where this great bull market for grains is headed?  Europe is a constant drag, increased competition from other world production areas is ramping up and MF Global didn’t make it easier.  So somebody say China!  Don’t worry, somebody already did.  They still have an insatiable appetite for grains.  Europe wants them too.  They just might hold the key looking ahead.  If we could get all the other ducks in a row, it’d be so much easier.