Is The Sky Falling? The Global Stock Market Meltdown Rocks the Grain Markets

Is the sky falling?  Are we still here?  Looking around you could almost see the hair standing up on the back of some people’s head last week.  It was one of those days.  When the TSX fell 604 points last Monday along with other exchanges around the world, I expected to hear about some people jumping out windows.  Our urban friends are not used to the extreme volatility farmers often see in their commodity markets.

On Monday night I got a call from a farmer from Langton Ontario asking me my opinion about the grain markets and how the market meltdown might affect the grain complex.  I don’t have a crystal ball when it comes to the grain markets.  Yes, I do write the corn commentary for the Ontario Corn Producer Magazine.  However, from my standpoint nobody can predict what will happen in today’s grain market.  With the plethora of speculative money in the market, predicting grain prices is more akin to shooting in the dark.

Needless to say I’m often pressed for my opinion on how good I shoot in the dark.  My Langton reader and I commiserated over the market meltdown and mused about money leaving commodities in droves in the morning.  With the sub prime mortgage problem in full gear in the US surely some of the grain pirates would be saying sell, sell, sell come morning.

It didn’t take long.  Grain plummeted on the open and it got worse during the day.  Soybeans were locked limit down and corn had tanked too.  This happened in spite of a decision by the US Federal Reserve to cut their over night lending rate Tuesday morning by 75 basis points.  When I heard that I found it hard to believe.  The US Federal Reserve hadn’t done that since 1984.  Needless to say, grains returned to their bullish long term ways the following day with corn locked limit up and soybeans regaining almost all their lost ground.  I’d call that volatility in spades.

In many ways the events of the last week illustrate just how jittery our global economy is and how it is affecting the grain market.  Over the period of the last year I’ve documented the huge effect biofuel has had on our agricultural economy.  We’ve had corn prices spike and then settle back and then spike again.  Soybeans had their acres severely cut back in 2007 and now the world is severely short soybeans, as the global fuel economy is demanding more and more soybean oil.  This combined with a high Canadian dollar has sent Canadian livestock producers for the doors.  American livestock producers are reeling too.  The food versus fuel debate is now raging worldwide.

Of course while “we” were dealing with all this, nobody really expected the sub-prime mortgage problem to impact so directly on the grain complex.  An indirect effect of it has been the value of the American dollar.  As I’ve said many times, the low US greenback is like testosterone to the grain markets.  It continually makes US grain cheaper and cheaper to foreign end users.  Having the US Federal Reserve make a surprise morning announcement that they were cutting their lending rate by 75 basis points was like a trap door under the greenback.  That’s one reason that grain futures prices found some solid ground so quickly.

Our American friends have a big problem with their economy and the rate cut did throw them a bit of an economic lifeline.  In short what it did was make all the bad sub-prime mortgage debt a little easier to handle.  At the same time it was an economic stimulus to their economy.  However, at the same time you could almost feel consumers grabbing their wallet.  Going forward in the short term, it’s likely the US will see more of the same, not necessarily good for the grain markets.

As volatile as it’s been, structural change within the market might even make it worse.  Reading Darin Newsom’s column last week, “DTN Indexes Revisited” he writes about ideas the CBOT has about increasing the daily limits for corn, soybean and wheat futures.  Corn would go from 20 cents to 35 cents, soybeans from 50 cents to 85 cents.  Wheat would go from 30 cents to 70 cents.  It is based on the newer higher prices for grains.  The old limits were raised in 2000 and no longer reflect the 10 to 11 % of the average futures price of the three grains.  So the grain gods want to fix that and make everything just that much more volatile.

If that happens its surely will make our new 2008 agricultural economic world more challenging.  Combine that with an already jittery global economy with strained grain supplies from surging demand and you’ve got a prescription for a calamity.  Send us one production hiccup and the sky’s the limit.  Going forward I want to plant at the right depth and hope for rain.  In this environment, that’s the least I can do.