Faster than Wall Street
October 3, 2008
Boy, that was quick.
The fat, fine profits most grain and livestock commodity prices held in July quickly disappeared – some faster than a Wall Street investment bank – by the end of September. Indeed, five commodity indices that monitor the ag, metal and energy futures markets, according to Reuters Sept. 30, plummeted an average 25 percent from July 1 to Oct. 1.
By comparison, Wall Street had a mild downturn. The S&P 500, a broad stock market yardstick, fell only 13 percent over same period.
Deutsche Bank, no Chicken Little, described the commodity crash as “the most aggressive sell-off… in recorded history,” according to a story on DTN.
Wow, if the tight-fisted, green-eye shaded Germans think it’s bad, maybe it’s time to grab the dog, the rifle and a file cabinet or two and head for the woods, eh?
Whatever you do, there’s no question this has been one ugly quarter in the futures markets: December corn down nearly $3 per bushel (bu.), or 38 percent; November soybeans down $5.88 per bu., or 36 percent; December cotton down a 20-cents per pound, or 27 per cent; and December Kansas City hard red winter wheat down $2.46 per bu., or 26 percent.
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The livestock pits, however, were only ankle-deep in blood Sept. 30 – December hogs down $11.70 per hundred pounds (cwt.), or 15.5 percent, while December cattle skidded $14.13 per cwt., or 12 percent, lower.
The reasons behind 2008’s rocket-to-no-parachute ride are both typical and atypical.
For example, grain markets typically unwind in mid- to late summer if drought gets rained out and corn pollination passes in pleasant weather. Also, come September, newly harvested grain pressures cash and futures prices lower.
This year, though, other factors turned the market’s usually slow, summer slide into a rout. The biggest was the big prices. Feeding $7 corn to (even) $70 hogs is a killer. As such, feed demand fell. So did demand by other grain hogs like ethanol and exports.
Second, the falling – really, plummeting – dollar, a critical driver that kept export prices cheap relative to soaring domestic prices, began to reassert itself. In March, one Euro bought $1.58 of corn, beans or beef; by mid-September a Euro bought $1.40. That loss of buying power, as well as the bloated mid-summer prices, slowed purchases.
The biggest hammer, however, was the unfolding mess on Wall Street. As banks balked and bailouts became the rage in August and September, market watchers estimate investors liquidated $50 billion or so in speculative long futures markets’ positions. In short, these longs ran and commodity prices sank.
Worse, when Wall Street stumbled, futures markets hit the floor. The House of Representative’s Sept. 29 vote to kill the White House’s $700 billion bailout plan drained the Dow of 777 points. No one in Washington noted, however, that the failed vote also sent commodities into the tank. Every grain, and most livestock, contracts that day ended down their permissible limit.
If the current slide continues – what’s to stop it: heavy market pressure from harvest has yet to be felt and Congressional action of any kind will not prevent a longer, deeper economic recession than thought just a month ago – farmers soon might be begging for a bailout themselves.
Four dollar corn, after all, given this season’s outrageous cost increases, barely covers the nut. And while $9.50 beans and $6.50 wheat show better returns, 2008’s profits won’t hold a candle to 2007’s.
Moreover, mid-summer estimates by the University of Illinois guess farmers will need $3.82 per bu. for corn and $9.65 for beans in 2009 just to breakeven – and neither figure includes land costs.
Like I said, the good times went quick.
© 2008 ag comm
Write to Alan Guebert at agcomm, 21673 Lago Dr., Delavan, IL 61734, or by email at email@example.com