Today’s selloff in the equity markets seems to have sucked down the ag commodity markets too, but they’re making a valiant effort to regain today’s losses.Â
Recently there’s been a fairly steady upwards progression in crop commodity prices, but today everything opened down and seemed to be threatening the upwards march. However, there seems to be strength underlying the ags because most ag futures prices are slowly climbing back out of today’s drop.
Where’s the recent strength in ag commodities coming from? One answer may be: the return of the risk premium. Usually commodities have a bit of a premium built into their price to account for the market’s fears that for some reason present estimations of supply may be wrong, or something may cut supplies, and future demand might be tougher to serve than expected. Some would argue that much of the high oil prices until July 2008 was the result of an extremely high risk premium coming from widespread belief in the Peak Oil theory. The same too can often be said for ag commodities, which are subject to the dangers of weather problems that can suddenly slash production estimates.Â
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But since July risk premiums in most commodities, including the ags, have disappeared. Since the slump began, the people in the markets have been so preoccupied with the collapse in prices and the world’s economies that few have had any fear at all about supply. Want some copper? You can buy a mountain now, cheap. Same with oil. Oil has become so unwanted that oil producers are renting supertankers to store the stuff. There’s been no fear factor about getting supply.
But ag commodities are a bit different. You might put off building a new house if you’re worried about the economy – that would reduce your personal demand for copper and lumber – but you’re unlikely to reduce your family’s demand for food. More and more people out in the world’s markets appear to be recognizing that fact, and noticing that stocks of crops around the world are actually quite tight, compared to demand.
There’s certainly little fear and no panic about supply yet, but the fact that the market does appear to be responding to fears about the effect of weather in Argentina and of a possible la nina weather phenomenon means farmers may start getting paid their risk premium again, and that would be a welcome development.
