Turmoil in financial markets takes toll on ag commodities

I am going to have to start expanding the range of significant dates that I mark on my calendar, and maybe you should too.

I’ve long marked down agriculturally significant dates, such as crop production and livestock inventory reports from Statistics Canada and the U.S. Department of Agriculture.

However, I’m now going to add stuff like the election dates of certain European countries, deadlines for when Greece has to meet debt repayment requirements and when U.S. politicians vote to renew the federal debt ceiling or to end or renew former U.S. president George Bush’s tax cuts.

These votes and decisions don’t add or subtract one bushel of crop or one kilogram of meat to the world’s food stores, but they can throw a nervous market into a tizzy, causing tidal waves of cash to wash in or out of the world’s futures exchanges.

For farmers, it is best to get your pricing done ahead of these political events.

The experience of recent weeks provides an example. Oilseed futures rose into the first week of May. Big crops were forecast, but the market seemed comfortable with that. The world needs more grain and oilseeds to rebuild exceptionally tight soybean, canola and corn stocks.

I’d spent lots of time analyzing agricultural seeding and stocks reports, but perhaps should have spent more time following the opinion polls in Greece and France.

Here is what I wrote in the May 3 paper after setting out the scenario of tight supply and strong demand:

“The market could move a little (lower) once seeding is complete and if the weather is conducive to good yields, but not a lot lower, barring a wholesale market melt down triggered by another crisis in Europe’s debt situation.”

I was aware debt remained an overhanging issue, that many Europeans were unhappy with the austerity measures their governments were implementing and that elections in France and Greece were coming up.

But I’d been lulled into a false sense of security because the agreements to bail out Greece, drafted during the winter debt crisis, seemed to be working. It appeared that, although it was difficult, Europe was finding a way to keep the debt problem from running out of control.

Also, most U.S. companies presented first quarter financial reports that were better than expected, giving stock markets a buoyant feel.

But then French president Nicolas Sarkozy, who along with German chancellor Angela Merkel was a chief architect of the European Union’s recent economic strategy, was rejected by voters who favoured Francois Hollande and his promise to ease the country’s austerity program.

Also on May 6, the Greek vote led to a stalemate where no party has enough support to form a coalition government. There is now a political vacuum in the country, even as it faces nearby deadlines to make payments on its vast debt.

Then throw in some disastrous trading at JPMorgan Chase that cost the bank more than $2 billion and you have a market that is shaking like a crack addict cut off from his supply.

This uncertainty will go on for weeks and maybe months, making it more difficult to revive crop market rallies, particularly because the weather is so far excellent for U.S. crops and turning good for western Canadian crops.

It was unlikely that this spring’s crop prices would stay at lofty levels forever, but the question was: were we due for a regular market correction or a melt down?

We don’t know for sure yet.

However, it would be good in the future to be more aware of the scheduled events that can trigger big market movements.

And we must be aware that those events go beyond agricultural reports to include political happenings far removed from the farm.



Stories from our other publications