European Bailout: Now We’ll See What They’re Made Of

EU2The last few years I’ve been asked to speak many times about the volatility in our agricultural commodity markets.  Much of this discussion had to do with the increase in noncommercial speculative limits in our world commodity markets.  In many ways this has changed the game where we have a lot more capital chasing different commodity contracts making volatility a much bigger constant in our agricultural prices.  For those of us who have priced our crops over the last 3 years, you know what a big impact this has had on our markets.

It is true but it is also somewhat nebulous and hard to see.  We know that agriculture markets are more volatile but talking about noncommercial speculative interests is not very sexy.  However, when I talk about the risqué beaches of the Greek islands, I think that I catch your attention.  Over the last year or more some of that risqué Greek behavior has certainly caused some heartburn in agricultural markets.  Hearing about Europe and their problems with regard to sovereign debt has taken a lot of money out of agricultural markets.

It is become easy to call Europe the festering sore thumb of the global economy.  I know in my market analysis for the Grain Farmers of Ontario, one constant has been all the macro issues in Europe and their effects on grain prices.  Nobody expected a solution very soon, so when it was announced yesterday that the Europeans had come to a last-minute agreement on a continental bailout plan, I found it hard to believe.  However, I knew that if it were true markets would spike next morning.

That is exactly what happened on Thursday as grains saw double-digit bumps with corn actually closing over $6.50 bushel.  The European optics had become such a story that an unexpected settlement certainly spurred fund money back into the grains.  The US dollar, which had become a safe haven, was suddenly getting whacked.  This helped the Canadian loonie.  It was one of those days in the grains where you thought we might be starting something again.  Of course, everybody was saying it was because Europe was getting it together.

I don’t know how this will pan out.  The European deal hinged on convincing private banks to take a 50% loss on Greek bond holdings and give the country a chance to pay off their public debt.  This will help reduce the Greece debt to GDP ratio to 120%, which is down from 180% now.  The Europeans have also decided to increase their bail out fund to about $1.4 trillion.  They are even enlisting a country like China to help them raise the money.  So it was a huge deal.

It doesn’t necessarily mean that Europe will become less of a festering sore thumb in agricultural commodity markets.  In my opinion, much of that will depend on whether the Europeans have learned their lesson, especially the southern Europeans.  Long paid vacations on the beaches of the Greek islands might have to be bypassed with a little bit more work and a little bit more savings.  European banks must learn not to loan money to people who have no intention to pay it back.  At the same time the lubrication of the economy, which is credit, must still flow.  If it doesn’t jobs will be lost and economic growth will suffer.  Get the picture?  There needs to be some type of fiscal responsibility especially when the common currency, the Euro, is shared throughout the continent.

So we shall see.  Nobody knows if the European debt deal will work.  However, it should.  There is enough money behind it to jumpstart the process but much will depend on the future behavior of European politicians.  It looks for now that this thing is being taken seriously and maybe at a certain point will wash up on the shores of agricultural demand.

It surely will take time, but let’s hope the financial corner has been turned in Europe.  With the specter of European banks dragging down their North American counterparts, noncommercial speculative money was being held off the table and certainly not being put into agricultural commodities.  Needless to say, with the European deal, many of these fund managers decided to put risk back on the table and put their money back into agricultural commodities.  With an acreage war looming in the spring of 2012, much of this capital will be looking for a return on its investment.  That should come by planting time next year.

So with this dithering, gloomy and wet fall of 2011 continuing, maybe it’s time to put that Europe thing behind us.  They’ve made the hard choice.  Now, we’ll see what they’re made of.