The Uncertainty Index is High: Bypassing Grains In the Flight to Safety

    I follow the markets incessantly.  It is been interesting watching some of the diatribe over the last few weeks as some traders have been very vocal about the 21 hour trading.  Low volumes during extended hours plus a myriad of other news has led to some very volatile trade at the Chicago Mercantile Exchange.

I do not understand the nuances of the 21-hour trading totally.  It was surely in response to the ICE trading in Atlanta.  It was also a response to a need to make markets run more efficiently and with the tremendous volumes of money looking for a safe haven these days, I’m sure the Chicago Mercantile Exchange is trying to accommodate that.  The more volume obviously means the more money they make.

So I will let that situation sort it out.  The more interesting thing regarding the volatility in Chicago recently has been all of the news regarding economic problems in this world.  Much of it has been negative lately and some of the prices of our commodities are reflecting that.

The prices that I quote on my twitter feed every day are corn, soybeans, wheat, the US dollar, the Canadian dollar, Gold and Oil.  What I find particularly significant over the last few weeks is the value of the Canadian dollar, the US greenback and the price of crude oil.  Today, the price of oil settled down to $86.46/barrel, the US dollar index was 83.225 and the Canadian dollar finished at .9667.  On March 23 the price of crude was $109, on April 27th the loonie was $1.0192.  So it has been a long way down.

The question is why?  In a nutshell the world economy continues to have problems, especially in Europe. Greece is going to default and the buzz grows everyday.  There are also rumors of runs on the banks in places like Greece and Spain.  There is also lots of talk about debt contagion and the domino effect in Europe.  At the same time there are problems in Asia, as the Chinese and Indian economies have slowed down.  With so much under the radar trouble in the global economy, there is a flight to safety.  Money is flowing into US dollars as well as US securities.

This activity in world financial markets has sideswiped agricultural commodities.  However, I suppose you could even make the argument there has been no sideswipe but a head-on collision.  The noncommercial speculators who have made commodities so hot over the last 4 years have grown weary of the dance.  In the month of May they have gotten out of all commodities in a big way and this has led to large selloffs in soybeans and corn especially in the old crop months.

I find the price of oil to be a litmus test for almost any audience.  For instance if I’m speaking to an agricultural group, typically people will know the value Of the Canadian dollar and the price of oil.  We know that in Canada because we are hardwired to know the value of the Canadian dollar, because many of us visit the United States often.  However, both the price of oil and the value of the Canadian dollar are quoted almost everywhere in our media. The price of oil down at $86 is certainly a long way away from what some naysayers like to talk about, the world of $200 a barrel oil.  You often hear that figure bandied about by doomsayers and some very aggressive Canadian economists.

The world of $200/barrel oil seems so far away now.  In fact, if the European situation gets a lot worse in the Chinese economy slows even more who is to say that we cannot see $50/barrel oil again.  Gasoline and oil demand has actually gone down in the United States lately.  Our Iranian friends seem to be making progress in the negotiations over nukes with the west.  The fear premium of oil seems to be going away.  This in itself is a stimulus for global economic growth.

The problem is raising up this world economy is going to take quite a bit of time.  In the meantime, the bad economic iterations within Europe and China will be negative for agriculture.  The price of oil is always a barometer of where we are at and $86 is telling me that we are not in a good spot.

So the uncertainty index is very high and it will surely cause even greater, violent volatility in our grains markets.  The expanded hours may make that much more intense.  The challenge for Canadian farmers is to market their crops with our eyes wide open and those standing orders sitting at the elevator or in the queue on your computer.  It’s been a rough last few weeks.  Outside markets are swirling in negative wind.  Let’s hope a black Swan comes along, that of the right kind to right the ship for at least the rest of 2012.