The markets are filled with traders throwing the R, D and C words at each other
But as markets gyrate wildly depending on which word is most popular each day, the F word provides hope that the L word won’t apply this time.
Here’s a list of those words and why they matter for crop prices:
R for Recession:if the world economy is heading into another recession, commodity demand will fall and the bullish sentiment driving commodity prices higher over the past couple years will weaken. People need to eat, but they don’t need to eat as much as they have been. Belts can be tightened.
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D for Depression:Some analysts believe an economic depression is still a realistic possibility because of critical financial problems across the developed world and financial bubbles in developing countries like China. With no way to resolve these huge problems, the world economy could go off the rails and demand could collapse for years. When people don’t have money, they can’t buy stuff and that includes food, no matter how hungry they are.
C for Correction:Stock markets have been hammered for a couple of weeks now, with the greatest volatility since 2008, but other than the daily volatility, this slide in commodity and stock market prices has been similar to the corrections that happen every year. Markets don’t just go straight up. A correction is defined as a setback of 20 percent, so this could be a helpful shaking out of excesses before another leg up in the economic recovery. With the markets set straight again, consumers around the world can once more enjoy the fruits of economic progress and eat more and better food and give farmers higher prices.
F for Fundamentals:Fundamental supply and demand factors for crops, including tight stocks for corn and relatively small stocks for soybeans, mean that unless demand absolutely collapses, crop prices can operate relatively freely from other commodity and stock market trends. Crop markets have been more resilient in the recent turmoil than almost everything else, including crude oil and industrial commodities.
Corn, which sets the price trend for cereal grains, including wheat, oats and barley, is at such low stocks levels that we could be in for another big move upward if this has just been a correction, and a recession would slow, but not stop people eating and having to pay for food.
Soybeans, the vegetable oil crop price-setter, are also tight enough to force buyers to compete for supplies.
Even a 2008-like market meltdown won’t necessarily cause crop prices to collapse, because the fundamentals mean the L word might not apply.
L for Linkage:During the 2008 meltdown, all asset prices collapsed with roughly equal velocity and for a similar period. Up until the bull market in commodities and stocks in the early to mid-2000s and subsequent collapse in 2008, most market economists believed that different asset classes moved in different directions most of the time, and that stocks and commodities generally moved in opposite directions.
But the bull market and collapse showed an incredible degree of linkage between these markets, and that when things go down hard, everything can go down equally.
But if you look at 2008 closely, it wasn’t a perfect example of linkage regardless of fundamentals. The market collapse began in late summer/ early fall, and that’s when crop prices collapsed. But that’s also the summer in which the world produced big crops of almost everything and alleviated the tightness in fundamentals that had driven crop prices high.
As Darin Newsom of DTN pointed out this week, 2011 is the opposite of 2008 on the crops side. Instead of continually increased estimates of crop sizes through the summer (like 2008), we’re getting downgrades, creating a different fundamental dynamic.
That means there is a lot of noise in the 2008 data and we can’t just assume crop prices will follow equities in lockstep, although those will have a big impact.
There is no question that linkage occurred in 2008 and is something farmers need to keep in mind. Just look at any long-term chart comparing stock, commodity and crop prices. When a financial and economic crisis occurs, commodity prices are going to weaken.
But right now, F is allowing us to hope L won’t apply, regardless of whether we are experiencing a market C or an economic R or D.
