The financial crisis in the United States continues to dominate all markets, including agricultural commodities.
Over a weekend of intense negotiations, U.S. legislators came up with a $700 billion US rescue package for the financial industry but on Sept. 29 the House of Representatives would not pass it.
Almost every investment, from equities to oil, were already falling when the House of Representatives voted 228-205 against a compromise bailout plan that would have allowed the Treasury Department to buy up toxic assets from struggling banks.
House Republicans, in particular, balked at spending so much taxpayer money just before the Nov. 4 U.S. elections.
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By the end of the day the Dow Jones Industrial average saw its largest point loss ever and the tech-heavy Nasdaq fell nine percent, its largest single day drop since the dotcom bubble burst in 2000.
In agricultural markets, live and feeder cattle futures fell their limit, shaving nearly three percent from their value.
Corn and soybean nearby futures on the Chicago Board of Trade fell by their daily trading limit. Corn was down 30 cents, or 5.5 percent and soybeans fell 70 cents or six percent. Wheat also dropped, by 48 cents or 6.7 percent.
Winnipeg canola fell 7.5 percent and barley fell seven percent.
Oil fell $10 per barrel to about $96.
Only gold rose as investors looked for a safe haven.
Even if Congress tries again later in the week and arrives at a compromise, many investors around the world wonder if it will be enough to quell the turmoil in the banking sector caused by the credit crisis. The nervousness increased as European governments were forced over the weekend to rescue several banks and lending institutions.
The credit crisis is slowing the U.S. economy. Consumer spending in August was the weakest in six months and the number of people seeking unemployment benefits jumped to a seven year high.
Things are in a mess and even if there is a U.S. financial rescue plan,it won’t fix the problems overnight.
Demand for all commodities will be down for a while. Credit will be harder to get.
There will be all sorts of readjustments and repercussions throughout the world economy, including agriculture.
Some of them will work to depress agricultural commodity prices, others will support prices.
- If Americans have less money or are worried about their jobs, will they manage their household budget by buying less meat? Usually, it is the most expensive meat, beef, that feels the pinch in times of financial uncertainty.
- The price of grain and other foods has fallen from the highs reached in the first half of the year. Ocean shipping costs have also dropped as commodity trade weakens.
That means offshore food importers will find it cheaper to bring in grain and oilseed from exporters such as Canada and the United States. If the price attracts them to buy more, that could support grain prices.
- Farmers who have trouble borrowing may find it even harder to get operating loans for the next crop. Crop financing is always a problem in South America and as credit gets more difficult to obtain, the soybean expansion in Brazil and Argentina might slow.
- Crop prices are weakening, but the cost of seeding crops has yet to fall back. Will farmers scale back their inputs like fertilizer leading to lower yields?
- Slowing economic activity is lowering the demand for oil, causing its prices to fall below $100 US per barrel, at least for now. Will this slow biofuel development?
I think the rest of 2008 will have little good news for farmers, but the outlook should start to improve in the new year so long as the U.S. economy does not totally crash.
The northern hemisphere generally produced large crops this year, but stocks-to-use ratios are still fairly tight so as we move toward the next big planting season, markets will become nervous about weather, crop acreage and stocks.
This will be particularly true if current dry weather in Argentina persists and damages the soybean crop.
As winter draws to a close, grain prices will likely have to rise to try to ensure enough land is seeded.
