Credit crunch crunching markets
December 15, 2008
If recent conversations with elevator managers and farmers are even slightly predictive, it’s gonna’ be a long, cold winter in corn and soybean country because the majority of 2008 grain, they say, is – gulp – unpriced.
In my flat, black and beautiful neighborhood, that’s a killer on land that giggled up 200 bushel corn and 55 bushel soybeans this year. June’s where’s-it-gonna’-end $7 corn market had many farmers projecting gross revenues of $1,400 per acre and net revenues between $500 to $700 an acre.
Likewise, bean returns were tall, too: $900 or so gross, $500 or better net.
Today, though, those figures are last night’s dream. Local cash corn is $2.85 and beans are a dime under $8. That means gross revenue per acre for either crop is now equal to or less than net just six months ago and net, well, there is no net – literally and figuratively.
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Worse, despite strong supply and demand fundamentals, this year’s price collapse shows no sign abating. Since late September, every major commodity market has tanked.
In fact, if you draw downtrend lines from Sept. 23’s action on futures price charts for corn, soybeans, wheat, cotton, cattle and hogs, every line would be as steep as a playground slide – 30- to more than 45-degrees downward.
The date is no more coincidental than the ensuing steep slide. Sept. 23 was one week after the Bush Administration announced its $700 billion bank bailout package and two days before a clearly divided Congress hoped to vote on it.
The package, like the vote, was unprecedented, and no one knew what it really meant. That was especially true, it turns out, for Congress, the U.S. Treasury, the Federal Reserve, and the stunned-silent White House.
The markets knew, though; they did what they always do in times of uncertainty – they sold. And since it was a time of great uncertainty, Wall Street and LaSalle Street sold greatly. That day, the Dow tumbled 372 points to (this is gonna’ hurt) 11,015.
The first few days that week, Sept. 22, 23 and 24, also marked the harvest season peak for Dec. corn futures at $5.72 per bu., Jan. beans at $12.03, Dec. wheat at $7.50, March cotton at 69-cents, Dec. hogs at $67.35 and Dec. fat cattle at $104.25.
Since then, holding any market instrument (stock certificates, corn, cattle) has been similar to holding razor wire: a bloody mess. Both the equity and commodity markets have moved lockstep downward.
Just how lockstep? The two more resemble Fred Astaire and Ginger Rogers than independent markets, reckons DTN senior market analyst Darin Newsom.
In a recent analysis, Newsom compared the “correlation between the Dow Jones and Reuters/ Jeffries CRB Index,” an index, he explained, “of a basket of commodity prices, including energies and grains…” His findings, noted in a Dec. 3 story, show that “over the last year… the two markets mov(ed) together, up or down, 82 percent of the time.”
In contrast, the two danced cheek-to-cheek only 59 percent of the previous decade’s trading days.
When Newsom focused on “just the last six months, the correlation (grew) even stronger, coming in at 91 percent.” A tighter focus on September through November showed “the markets moving together an astounding 96 percent of the time.”
Little wonder today’s commodity markets are bent beyond reality: The failure of the Administration’s bailout plan to reignite credit markets has all markets following Wall Street’s stumbling lead. Commodity markets will climb when the Dow climbs and the Dow will climb when credit loosens.
So, when’s that?
I don’t know, but I’d bet an avalanche of grain will hit the market about 10 seconds later.
© 2008 ag comm
Write to Alan Guebert at agcomm, 21673 Lago Dr., Delavan, IL 61734, or by email at email@example.com