Printing Over Half a Trillion US Dollars Don’t Lie: Markets Feeling the Heat

QE22222Risk, is a relative thing.  A few months ago I was writing “Market Trends” my monthly look at the Ontario corn market for the Grain farmers of Ontario.  Over the last five years of writing that piece I have not only learned a lot but I have come to know some very bright corn buyers and brokers within the Ontario corn complex.  The price of corn had been hovering around the $3.80 mark for quite some time last summer.  So I remember talking to one of the buyers who told me he had bought a lot of corn at $3.80 because farmers were thinking they could do pretty good with that.  So now that the same corn is five dollars plus a bushel has the risk increased or has it been mollified?  I’ll let you chew on that one for a while.

Rewind a few days to me harvesting corn.  I had finally got to my last field and was looking forward like all of us to getting it finished.  Harvest had gone pretty well for me; I hadn’t had any breakdowns, not even any nervous breakdowns.  So as I eyed the last 20 acres it was like I was living a charmed existence.

The only problem was little known to me a plastic shroud which encased in major shaft in my combine behind the cab had decided to heat up possibly because the space between it and the shaft had become full of dirt.  So over a period of hours it was slowly filling up the front of my combine with burning plastic, effectively turning my combine into a smoldering time bomb, which at any moment could light up.

Of course, I was late for this party; I didn’t know it was happening.  In retrospect I thought at one time I smelled burning plastic but I couldn’t figure out where it was coming from.  So when the big plume of black smoke burst out the side of my combine, I was surprised.  I had played it over in my mind many times what I would do if the combine was on fire.  I got out with a fire extinguisher in hand and put the fire out, or at least what I could see.  The smoldering within my combine was considerable and that wasn’t the end of the story.

Your loyal scribe like most of you did his best to clean things out but alas it didn’t work.  I tried one more round and when I got to the end I looked back and the whole field was on fire.  Long story short, I rescued all my equipment and at the end of the day the damage was only 30 acres of burned corn stalks.  The wind was blowing the right way.  With the problem diagnosed and the hotspots cleaned out my harvest ended the next day.  It’s the last thing I expected. I have always watched for fire on a combine like a hawk.  At the same time I have always carried a fire extinguisher.  Yes, risk is a relative thing.  Sometimes you can’t see something coming, but you always have to be ready.

In many ways that story mirrors the commodity story, which we have seen unfold before us in 2010.  For instance last week I outlined my feelings regarding the QE2 and this week we found out from the US Federal Reserve that they were effectively printing $.6 trillion.  With that Americans got a collective pay cut and commodities got cheaper for foreign buyers in a big hurry.  Prices are spiking higher and it’s mostly because we have $.6 trillion on the ground making that US greenback cheaper.  If you told me that back when corn was $3.80, I would’ve said you were crazy.  At this point in time the risk looks like we might be selling too low.  Yes, it is all relative.  I was a genius just before the smoke blew out the side of the combine.

What is interesting about the Ontario corn situation is that despite these high prices, it’s still been the cheapest corn in North America this fall.  That has led to a lot of corn being exported at fire sale basis price levels.  Who knew?  Now with QE2, maybe that was the deal of the century.

As fire raged around me last Saturday, the site of the Dawn Euphemia fire department rushing toward me was welcome.  Like most volunteer fire departments in rural areas, they are my peers and I knew most of them.  It was ironic to me in many ways because five years ago I had mentioned them on the steps of Parliament Hill when I MC’d the big Ottawa farm rally.  In fact most of them were there that day.  They had asked me to mention them because they were concerned about how the lack of a Canadian agricultural policy affected their ability to fight fires.  In effect, the policy was depopulating the rural area making it difficult to find rural firefighters.  Here they were six years later helping me out.  Much appreciated.

In many ways I feel now our marketing outlook is a lot like my combine heating up.  I had no idea what was about to happen.  With a short US corn crop, over half a trillion US dollars raining down on the United States and the November night USDA report due next week, all bets are off.  Will gold go to $10,000 and the US dollar drop another 20%?  In this environment, who am I to say?