“Big Ag” Gets Downgraded, Commodities Swoon, We’re Talking Real Money

It’s the busiest time of the year for me.  When I’m combining soybeans and planting wheat at the same time, it’s about as nimble as I can be.  However, with the meltdown in our commodity markets, I’ve got other wheels turning.  Why are we were we are?  How much damage is yet to come and of course how will Canadian farmers muddle through it?

It’s different this time.  For instance on Thursday shares on the Toronto TSX were sharply down with the culprits being “big Ag.”  On Thursday, Merrill Lynch (I know, not the smartest bunch) downgraded the fertilizer sector from their basic “buy” position to an “underperform” position.  According to the geniuses at Merrill Lynch farmers might not be too enamoured to plant corn next spring, because it will cost too much and prices have come off record highs this past July.  Needless to say Canada Potash Corporation lost 20% of its value Thursday morning with Agrium losing 15%.  Even the big global mother ship Mosiac was showing some pain.

Rewind to the day before yesterday.  My Certified Crop Consultant pulled into my field and jumped into my combine cab.  He told me markets were real ugly today and the discussion quickly turned to why.  He started resuscitating the corn versus soybeans acreage decisions ahead for 2009 and mentioned a “war for acres”.  I started shaking my head, because I thought he obviously didn’t get it this time.  I told him in no uncertain terms, what we’re talking about now is liquidity.  What we’re talking about here is cash.  What we’re talking about is real money.

He’s a real nice guy, a great agronomist, but it was obvious, he still didn’t get it.  So I told him the story about my grandfather in the depression.  Grandpa and the rest of the Baptist deacons were sitting around the Church one night and they found the Church was coming up a little short for cash.  So they all agreed to throw a few bucks in to keep the Church going.  So the next day, Grandpa finds out the bank manager, “Old Slat”, had bounced his cheque!  How embarrassing!  So Grandpa goes up to the bank, hides behind the corner, waits for “Old Slat” to come out, grabs him, throws him up against the wall and says, “Slat you dirty blankety blank!

You see Grandpa had no money.  In fact nobody did in Dresden at the time, except “Old Slat” the banker.  In many ways, that’s what been happening over the last few weeks in financial markets.  The only problem is credit makes everything work and with American banks failing or threatening to fail, it’s dried up everything, including the players in the commodity markets who are selling everything “tangible” to shove some cash into the outstretched hands.  Grain markets have tanked in such an atmosphere.

I explained that to my certified crop advisor and he was a bit taken aback.  Maybe its because he wasn’t used to me telling that story.  He went away a little unnerved, not unlike most of us these days.  No, “Old Slat” isn’t around the corner, but this is the closest I’ve seen us come to it in my lifetime.  When money and its derivatives dry up, economies shrink.

It begs the question, is everything we’ve learned to believe since October 2006 “out the window.”  Is the great demand driven market, which has pushed prices since that time a fraud?  Or is this a temporary setback with both India and China posed to “cash in” on these cheaper commodity prices?  Are the $200/barrel oil predictions of only a few months ago out the window?  Or is it all to do about nothing?

A week ago Elaine Kub wrote a piece entitled “Old Bears, Young Bulls”.  In it she quoted a farmer who told her, ” I guess us old guys are always used to seeing low prices like that.  Seems like you younger folks are always more bullish.”  In the piece Elaine mused that since she had worked at DTN corn and soybeans had been in a long-term higher trend.  Her comments struck me because I’m like that old guy talking to her.  My past 22 years writing this column puts me squarely in his boots.  I used to be the young writer/analyst/evangelist/loudmouth, but through market attrition, I’ve earned my spurs constantly looking over my shoulder for that proverbial black cloud over the market.

I do remember 1988 with my crops burning up.  I would wager that moving forward market analysts will hearken back to 2008 when the sub-prime mortgage thing reared its ugly head, credit dried up and our great demand driven market contracted.  It’s another thing, which will paint things moving ahead.

Dealing with it is another thing.  Our American political friends are trying to fix it.  However, it’s like putting warm toothpaste back in the tube.  Confidence is shaken, careers have been impacted and I’ll wager grain ending stocks will grow because somebody left with the money.  You can hide behind the corner if you want and see if “Old Slat” comes out, but I don’t think this time.  What’s happened in the financial markets is having a severe impact on the Canadian economy.  Its effect is long term.  Now that the money is gone, getting back to where we want to be, might take a very long time.