“Quantitative Easing”: US Fed Action Will Surely Challenge Our Marketing Outlook

QESmallMy days are full of corn.  I say that because for the last two weeks I have firmly been ensconced in the cab of my big green monster.  Harvest on my farm has been a surprise as corn yields are at record levels after an extremely dry August.  You can’t get much done when you’re constantly full of corn.  Of course that is the point, the more corn the better, I’m very thankful.

Harvesting corn is much different for me compared to harvesting soybeans. When I harvest soybeans I’m constantly looking at the cutter bar to avoid rocks going into the header.  I’m quite happy with the technology of my new grain head, getting a big rock into the combine is not impossible but it is much less likely verses some of my combines of the past.  On the other hand when I harvest corn the corn head is above ground level and only get a rock in the combine when it hops up in.

One constant I have in the combine whatever I harvest is my satellite radio.  I listen constantly to Bloomberg News because they have excellent commentary on the US economy and the world of business.  Their commentary is different because it is so interesting and for the last couple of weeks I’ve listened intently as guest after guest has been talking about the US Federal Reserve and quantitative easing.

The US Federal Reserve is making noise about another round of “quantitative easing” which essentially is a process where they print money and buy US government securities.  This has the effect of adding liquidity into the economy and of course it has a very negative effect on the US dollar.  Short-term interest rates are lower and the great hope is for some type of short-term economic stimulus where people start getting loans again and spending money.  I find it a fascinating concept especially in these times post-2008 meltdown.  The simple fact is the US economy still is suffering from a lack of stimulus despite the fact that billions of dollars have been spent to get the economy moving again.  Quantitative easing to the tune of a half or $1 trillion may be in the offing as soon as next week.

There are several terms to describe what this really means.  For instance, I have talked about monetizing American debt and printing money.  We now hear of the term “quantitative easing” and an even newer one called “debasing the currency” or in the American case, debasing the US greenback.  With the US Federal Reserve very worried about deflation printing this money seems appropriate. Federal Reserve chairman Ben Bernacke is an expert on what happened during the Great Depression.  That’s where his academic background lies.  It is been suggested by some that the US Federal Reserve’s tendencies at the present time have much to do with Mr. Bernacke making an active move to help the economy (quantitative easing) versus doing nothing which is largely what happened at the start of the Great Depression.

My question is how will “quantitative easing” affect our agricultural commodity prices?   In effect with our American friends “monetizing their debt” by default will we be moving into a period where our agricultural commodity prices will be “monetized” too?  In other words, depending on the degree of quantitative easing by our American friends will agricultural commodity prices move to new levels based simply on the American government printing money?  I think so.

Some of you may feel that it’s already happened.   A basic premise in 2010 for commodity prices is a lower American dollar means higher futures prices.  This has always been the case but the difference this time is the very real specter of an American government actively trying to debase their currency.  Next week we should learn more about the direction the US Federal Reserve will take.  When you combine that with another USDA report on the horizon with possible lower supply numbers, the bullish testosterone in the markets only grows bigger.

The long-term problem with QE (quantitative easing) may well be inflationary pressures, which will only boost commodity prices further.  In many ways it almost seems a perfect storm for the commodities market.  We’ve got a short supply situation compounded by a lower US dollar and a government that seems intent on making that even more so.

How we react to this in Canada will be key.  You can tell that Bank of Canada Gov. Mark Carney has his hands tied because of the uncertainty with both the US economy and QE.  What is the Bank of Canada supposed to do?

Of course the results of much of this has been manifested in increased Canadian cash grain prices.  I’m very aware of that after each combine round of my record corn crop.  It’s a funny business.  A couple of years ago “quantitative easing” wasn’t even part of our commodity thinking.  Here we are going into 2011 and for our cash prices, it’s like the next big thing.  How much QE will there be and what will that do?  I only hope it makes the American economy burgeon again.  Simply put Canadian farmers need that.  However, we are bystanders.   As the Americans debase their currency and monetize the debt, we can only stand back and watch.  It surely is making our marketing outlook more challenging.