Market madness and political nonsense
October 10, 2008
Has the world or just the markets gone mad? Actually, I think the markets are following a rather predictable pattern, but I am convinced that the world is going mad and that our politicians couldn’t find their backsides with their hands tied behind their backs. So why do any of us expect them to find a solution to our current financial mess? I don’t claim to have the answers for the present financial fiasco, but I do know that most of the reasons behind this mess were created by the very politicians who are now promising to fix it.
This latest bailout bill, which was loaded up with more pork than a Jimmy Dean Sausage, is not asking the fox to guard the hen house but rather it is putting the fox right in the middle of it. Those who would claim that deregulation in the financial markets caused this problem are rather short sighted in their analysis. While that may have been a contributing factor, the involvement of government in the housing market with Fannie Mae and Freddie Mac creating a set of lending standards that all sane and truthful individuals knew was not sustainable, is the real culprit.
So, what does this have to do with you as a cattle producer and why am I writing about it? In a word, CREDIT. Cattle feeders have generally lost money the last two years and based on current calf prices many cow-calf producers are likely to lose money this year. That means you will all likely need more operating money to work with next year, and if this financial crisis doesn’t get solved, you may have a difficult time finding banks to loan you money. In general, the agricultural economy has been fairly strong the last couple of years, so banks that have been lending to agriculture are likely in a sound financial position. However, I would still encourage you to visit with your lender sooner rather than later to make sure that you will be able to obtain the financing you need.
Now, back to the wild markets that are actually behaving in a predictable manner. I remember several years ago a specific conversation I had with my dad. He was running a large numbers of stockers on grass that summer and we were commenting on how strong the feeder market was at the time. It exceeded our expectations. It was higher than we thought was justified by the market fundamentals and when the market exceeds your expectations, it is usually a time to sell. We didn’t. The market was below our expectations when we did.
What have we been hearing for the last couple of years about the stock market, the oil market and the corn market? They have been exceeding our expectations. Speculators are running up the prices. They are over priced relative to the fundamental supply and demand conditions in the market. Well, big surprise, they just adjusted back to or below our expectations. Where have all the speculators and their money gone?
Let’s examine three major markets: the Dow Jones Industrial Average (DJIA), crude oil and corn. Each of these markets has a very similar pattern.
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In October of 2005, the DJIA was trading around 10,500 points. This is a broad index for the measure of the overall strength of the stock market. By October of 2007 this index had increased to over 14,000 points – an increase of 40 percent. Do any of you really believe that the economy, or that the companies represented by the DJIA, actually grew in value by 40 percent in two years? No. Everyone knew that this market was over bought and ready for an adjustment. By September of this year the DJIA had declined back to 10,500 points and in fact now in early October it has declined to 9,500 points. This is likely an over correction by the market but it reflects how pessimistic the market is and probably how little faith the market participants have that government will actually solve the financial problems the nation is facing.
A year ago, October 2007, crude oil was priced around $82 per barrel. The price of crude then increased to $145 per barrel in July of this year. That is a 77 percent increase in value. Did we suddenly run out of crude oil? No. Did we produce that many additional new cars for the world to drive to therefore increase the demand for oil? No. Were market analysts saying this market was too high, that it exceeded the fundamental price level? Yes. Speculators were blamed for driving up prices. Since July, prices for crude oil have now declined to about $90 per barrel. Did we drill for any more oil? Not yet, but let’s hope we do, just look at what the announcement that we were going to drill has done to the market.
The corn market has been even more volatile than oil. Last October corn was priced at $4.25 on the Chicago Board of Trade. Then the corn and soybean markets entered into a bidding war to try and buy acres for the next year’s crop and prices began to increase rather dramatically. Never wanting to miss a good market rally, speculators facilitated and fueled this rally until corn prices reached $8 per bushel in June of this year. That is an 88 percent increase in the price of corn in an eight month time period. I ask the question again, was that fundamentally justified? No. In case you haven’t looked at the futures quotes in the last few days, corn is now back down to trading around $4.25 per bushel.
All of these markets support the age old adage: what goes up must come down. That adage is particularly true when the reason for a market increase is driven more by speculation than by any underlying fundamental structural change. There is another market saying that even a dead cat will bounce if it falls hard enough. What money I have left is invested in the stock market and I am going to buy my winter corn needs now.