Investment Capital Looking For It’s Own Cocaine: How Do You Hedge That?

Commodity Buzz    It is wet in southwestern Ontario and my grand plans for planting corn in April are getting delayed.  I still hope to be planting before Mayday but constant rain in this part of the world is seriously threatening that dream.  So maybe I should be concentrating a bit more on my marketing these days whether that be corn, soybeans, gold or even bitcoin.  At a certain point the sun will shine and I’ll be ensconced in a tractor seat until Canada Day.

It has sure being an interesting few weeks in the markets.  Last Friday after I wrote this column we saw a meltdown in the gold market, with the shiny metal losing $241 an ounce in 3 days.  It was a crazy fall for a metal, which has always been rock solid in my mind as a hedge against bad times.  Gold itself doesn’t do much, you can conduct electricity through it and maybe use it in some specific applications, but it’s really about religion.  In order for gold to have some value, you have to believe in it.  If you are from South Asia, gold is very important when you get married, but for those of us ensconced in North American farm country, it generally represents a flashing quote on our DTN monitor.

So it has always been a mystery to me why gold is so expensive.  Yes, I understand the significance of currencies and having something tangible to base them off of.  At one time our currencies were based on a gold standard, but of course in 2013 that is laughable.  Needless to say, the drop in gold had more to do with traders covering their losses in many other commodities, as the tone of the market has turned quite bearish.

Think of it this way.  I recently read a piece by Warren Buffett regarding his feelings on investing in gold.  He said that today’s physical gold stock amounts to about 170,000 metric tons.  If it were melded together it would form a cube of about 68 feet per side, which would comfortably fit inside a baseball infield.  At the time he wrote that piece gold was valued at $1750/ounce, which would make that cube $9.6 trillion.

He then asked readers to take that same value and buy 400 million acres of US cropland, which produces $200 billion annually. He said you could also buy 16 Exxon Mobil’s, which earn $40 billion each annually.  This would leave $1 trillion walking around money.  He asked what would you pick the big cube of gold or the US cropland and Exxon Mobil?

The bottom line is people will buy gold anyway because they believe.  They believe that even though gold will produce nothing, somebody will come along to pay them more for it in the future.  It is one of those investments, which is just hard for me to figure out.

The world is full of these investments, especially the last 15 years when you add the Internet to the equation.  One of my favorites is Dallas Maverick owner Mark Cuban and  He started that during the ill-fated craze, where many unexpected investors were investing in things that made no sense.  Mark Cuban though, sold out for $5.9 billion before the crash.  The rest as they say is history.

Then there is Facebook, which really doesn’t produce anything and was valued at over $100 billion at its IPO, but may be worth half that now.  I won’t even mention Bitcoin, the elusive Internet currency.  It’s insanity.

The only problem is all of these investments are a huge part of the agricultural commodity market.  We all knew last week when gold started tanking that our agricultural grain futures prices did as well.  There was really nothing that could be done to stop it despite some technically bullish fundamentals.  It seems where once the ethanol fueled commodity boom, which brought billions of dollars into commodities, is now solidly in reverse, looking for the quick hit, anything driven by headlines fed into a computer-trading algorithm.  It makes me wonder as farmers how do we really hedge our grain prices when nothing seems to make sense?

Case in point our new crop prices, which show me nothing other than the fact that the market sees blue skies ahead.  This is at a time when heavy rains have inundated most of the Eastern Corn Belt, which is delaying planting.  At the same time, the north-central plains and Western Canada are still snowbound.  However, the market yawns. In many ways, it just doesn’t add up.  Investment capital in some ways is looking for its own cocaine and if that’s gold one day and maybe a few bitcoins the next, damn the torpedoes and the fundamentals of grain.  As farmers, we have to get that.