Agricultural commodities are caught up in a continuing U.S. financial crisis in which stock values plunged, then rose last week in the most volatile trade since the days following the 9/11 terrorist attacks.
Markets were reeling after heavyweights in the financial services sector succumbed to the fallout from the U.S. sub prime mortgage crisis.
During the tumultuous week, financial powerhouse Lehman Brothers declared bankruptcy, Merrill Lynch was purchased by Bank of America for pennies on the dollar and the U.S. Federal Reserve bailed out insurance giant AIG.
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By week’s end, markets had rallied based on news that the U.S. government was formulating a permanent plan to shore up financial markets that could cost U.S. taxpayers more than $1 trillion.
Grain and oilseed prices followed the same roller-coaster ride as other commodities.
By Sept. 19, wheat had recovered the ground it lost earlier in the week, barley’s rebound wasn’t as complete and canola was still down a fair bit from the previous Friday.
Analysts predict that while the worst is over, it could be the beginning of a prolonged recession in the U.S. economy. But they differ over what that means for agriculture.
Peter Hall, chief economist with Export Development Canada, said what’s left in the wake of the meltdown are financial companies that are far more risk averse than they used to be, which presents a problem for almost all sectors of the economy.
However, agriculture should fare better than others.
“It’s a sector that in these kinds of circumstances has been better favoured because people still have to eat,” he said.
Combine that with strong fundamentals in agricultural markets and there is reason for optimism. India and China’s growing middle class, soaring demand for biofuel and an inability to quickly increase food supply has Hall feeling bullish about agriculture.
“We feel, even though prices have corrected quite a bit, that the price prospects for this sector are still quite good.”
Hall was preaching that message this summer at the Canadian Special Crops Association meeting. Since then, canola prices have fallen 29 percent.
“I hadn’t foreseen that we were going to get the kinds of price declines in the system that we’ve got right now, but I’m still bullish on agricultural prices in general,” he said.
Errol Anderson, analyst with ProMarket Communications, isn’t as optimistic.
“The whole grain market is going to lick its wounds right into 2009.”
His forecast for most crops is bearish. Two weeks ago he was calling for canola to drop to $10 to $10.50 per bushel. After last week’s events he thinks it could fall as low as $9 per bu. Flax and canaryseed are also on their way down, although some crops have overcompensated.
“Edible peas have gotten too low. Park them in the bin,” said Anderson.
No light in tunnel
Markets turned south around mid-summer and won’t bottom out until mid-October, he predicted. By the time the wrecking ball stops swinging, agricultural commodities will have lost 40 to 45 percent of their value. And there is no recovery in sight.
“There is no quick fix. The reason why is the markets were bought up with credit. A lot of speculative money was in the February to May rally and that is gone,” said Anderson.
The first blow came when the sub prime mortgage crisis got deep enough that it set off a banking crisis and a tightening of credit or “easy money” in the U.S. economy. Banks started asking for more collateral from the funds that had invested heavily in commodity markets.
“The funds that couldn’t pony up and finance their positions basically had to start selling,” said Anderson.
Last week, the crisis reached deeper into the financial services sector, threatening to take down AIG, a company with huge commodity market holdings.
“It just kind of implodes on itself and that’s what we’re seeing,” said Anderson.
He doesn’t buy into the belief that strong market fundamentals will insulate agricultural commodities from the U.S. financial tornado.
“China will default on contracts in the blink of an eye if they can buy it cheaper and that’s exactly what they’re doing right now,” he said.
The only thing that could turn things around at this point are weather scares in 2009. But the trump card is that this is a different market with more cautious players.
“The banking industry has been hurt so much they’re not going to get caught holding the bag again,” said Anderson.
He doesn’t believe the shake-out is over in the financial sector. It is clear to him that the U.S. economy has entered into a deep recession.
That’s one area where both analysts agree.
Hall said the U.S. economy is still working its way through an oversupply of new housing and will be restrained by tight capital and a severely weakened financial sector.
“I don’t foresee cataclysm or disaster but it’s going to take us a while to work through this one,” Hall said.
“This is going to be a prolonged down cycle and we’re looking at the first half of 2010 before we can see some growth starting to occur in beleaguered sectors like housing and autos and so forth.”
