Little has changed in grain fundamentals, but prices have crashed since the world’s investors panicked about financial problems in the United States.
Grain markets were already dropping from highs posted in late February and early March when they were caught up in the credit crisis.
By the close March 2 nearby Winnipeg canola and Chicago soybean contracts dropped about 24 percent from their peaks, Chicago corn dropped 11 percent and Minneapolis wheat dropped 33 percent.
Oil, gold and equities also fell as investors worried that the U.S. credit crisis would morph into a recession that would put the brakes on the world economy.
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The collapse of Bear Sterns, the fifth largest U.S. investment bank, was a particularly worrisome development.
It seems hard to believe that some bad loans to homeowners could cause a bank to collapse, others to waver under multibillion-dollar losses and generally rock the world financial system, but that is the case.
David Leonhardt in the New York Times March 19 took a swing at explaining it to the layman.
The booming housing market of the early part of this decade attracted lots of buyers who had little cash. Lenders came up with new types of mortgages that had low initial interest rates, but higher long-term rates because of the risk. The higher interest rates were attractive and the lenders sliced the loans into pieces and sold them to big investment funds. Leonhardt says investors, in America and around the world, boosted their returns through leverage. For example, they’d buy $100 million worth of these mortgage packages with $1 million of their own money and $99 million of debt.
If the investment rose to $101 million, they doubled their money. All was good so long as housing prices continued to rise. But then a little weakness in the economy caused the housing market to falter and prices began to fall.
The mortgage investment fund might dip to $99 million, but that wiped out the $1 million the investor actually had invested.
This began to spark huge losses throughout the financial community, said Leonhardt. Banks and other lenders began to hoard what cash they had left, cutting off lending even to solid borrowers, further slowing the economy.
Analysts said some of the selling in commodities in the last two weeks was prompted by cash-short investment funds taking profits from the runup in grain prices.
Who knows how long this can go on or whether it could really cause a major depression?
The U.S. Federal Reserve has been active, trying to return confidence to markets by cutting interest rates and making extra loans available to financial institutions.
Other central banks around the world are also helping.
Some believe the panic will subside and, in grains at least, prices will firm again.
Indeed March 24 grain prices and other commodities saw a bounce.
While the bubbles in the frothy market might have popped, fundamental supply and demand continue to provide strong underpinnings to grain markets. Markets must provide incentive to farmers to produce big crops.
As always, weather will be a dominating factor in what is finally in the bin next fall.
Large parts of the Canadian Prairies, North and South Dakota and Montana are dry and desperately need good spring moisture to start crops.
Environment Canada’s forecast for March through May is for cooler than average conditions on the Prairies and perhaps more moisture than normal in Manitoba but drier than normal conditions in southern Alberta and southwestern Saskatchewan.
The central and eastern U.S. winter wheat belt has seen rain in recent weeks. Large parts of the Midwest are getting too wet, the threat of flood is growing and farmers are talking about spring planting delays.
Production prospects in Europe, Russia and Ukraine look good.
Moisture in the eastern part of Australia is much better as farmers prepare for seeding, but it is still dry in Western Australia.
Moisture appears to be a mixed bag in North Africa, a major durum wheat producer and importer, as its winter seeded crop comes out of dormancy.
