Ag commodities caught in panic

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Published: August 23, 2007

Farmers busy with harvest might have been ignoring the markets.

That’s probably a good thing, because last week the sinking subprime market of poorly backed mortgages in the U.S. not only slammed worldwide stocks, but also dented the crop markets that determine grain farmers’ incomes for the coming year.

However, advisers say it’s far too early to assume that this short-term weakness is anything more than a financial market blip as far as crop prices are concerned.

On Aug. 16, a day dominated by panic on Wall Street, prices plunged at the Chicago Board of Trade and the Winnipeg Commodity Exchange.

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Canola was particularly hard hit, following soybeans’ lead, falling about $14 per tonne Aug. 16, before recovering much of the lost ground the next day.

That took canola briefly under the $400 per tonne level for November, although it was crawling along at $401 per tonne Aug. 20.

The agricultural commodities selloff was a shock to many market players, because most had assumed that the crisis in subprime mortgages would be restricted to specific lenders, or to the financial industry or to the U.S. equity markets.

But as the shockwaves of the subprime quake spread further, they hit agricultural commodities, proving that crop markets live not only in the same world, but in the same neighbourhood.

“It’s not the fundamentals of an individual market that matter,” said farmer adviser Mike Jubinville.

“When the credit crunch hits, (investors relying upon borrowed money) need to raise capital for margin calls or otherwise, and it’s sell and sell whatever will sell, and ag commodities sort of got caught up in that kind of spiral.”

Panic gripped the equity markets, with investors terrified that stock values would fall and companies become unsound if the credit crunch continued. But analysts say little fear and panic gripped the agricultural commodity markets even as they sold off.

Joe Victor of Allendale Inc. in Chicago said hedge funds and other speculative investors were forced to sell large amounts of crop futures positions to pay for their exposure in the panicked markets.

“In order to raise capital to pay margin debt, they’re leaving the grain markets,” said Victor.

While speculative funds quickly dumped soybean and corn positions, driving down their values, they were less keen to close out their wheat positions.

“They’re willing to hang on to wheat for the time being,” said Victor. Speculators see wheat, with its tight stocks-to-use levels around the world, as being a good bet for a coming bull market.

But even that analytical view won’t keep them in wheat, or hold prices up, if the equity markets continue to plunge.

“If we see another dip in the Dow (Jones Industrial Average), a 100 or 200 point loss, wheat can only hang on so long,” said Victor.

This decade has seen major change in the world of agricultural commodity futures trading. Until 2000, futures trading was dominated by commercial users such as farmers, grain companies, millers and food processors.

But in recent years, huge amounts of money have flowed into agricultural commodity futures contracts from hedge funds and other speculators, who see this market as just another part of the overall financial machine.

Many of these investment funds rely not on supply and demand but instead on “quantitative measures,” or numerical calculations made by computers.

This has increased volatility, causing prices to swing because the funds often make large moves in unison when a predetermined trigger is pulled. That has made some market watchers gun shy in the face of last week’s mass selloff.

“The huge involvement of fund money in commodities has made these markets inherently unstable,” said newsletter Agriline Daily the day after the rout.

“No one saw this coming, and in fact some prices opened firm this morning. This is a time to sit tight and stay out of the markets until things settle down, though that could take a while.”

That’s OK by Bruce Dalgarno, a Newdale, Man., farmer and marketing enthusiast. He’s busy harvesting his early crops and has already sold everything he’s comfortable selling before it’s in the bin.

He’s not too worried that this recent slump will become a longer term trend.

“There should be more positives than negatives in the (crop) markets, so after this dip I think the price will go back up,” said Dalgarno, who was sitting at home because rain had gotten in the way of winter wheat combining.

“It may take two weeks or two months, but it will happen.”

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Ed White

Ed White

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