I’m glad I’ve been noting how overwhelmingly bearish I am about the markets for the second half of 2011. Even on Wednesday, when I was trying to find reasons to be bullish, I was halfhearted, because I just couldn’t find a lot of reasons to think commodities would avoid being pulled down by the pile of problems weighing down Mother Earth right now.
Regardless of crop supply and demand fundamentals, if the world tanks, so will the ags, methought.
Well, it appears the global marketplace was thinking the same way, because yesterday everything crashed.
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“Worst One-Day Fall in Global Equities in Two Years as Economic Fears Grow” said the Globe and Mail’s front page story this morning.
Here are the first two paragraphs of the story:
“The nerves of investors appear to have finally snapped amid mounting fears that the global recovery is stalling and that governments and central bankers are fast running out of ways to fix it. Oppressive worries of a return to recession plunged stocks into freefall Thursday, sent many currencies tumbling and left most commodities bloodied.”
That about sums it up.
As I watched Bloomberg TV at breakfast this morning, everyone was awaiting the U.S. jobs report. It came out a bit better than expected, and that gave markets an opening pop. But that soon faded as people took a chance to bail from long positions they had been stuck with yesterday. (Perhaps nursing a gin-tonic at the beach and out of the reach of radios and frantic calls from their broker.) Right now the S and P 500 is down 1.36 percent and the DJIA almost one percent down.
Oil got hammered down yesterday, dropping 6.1 percent. Copper fell 2.1 percent. Even gold fell a bit.
Canola and the other ags fell too. Regardless of fundamentals. What I blogged about the other day when I was looking for reasons to be bullish about the ags was mostly to do with the benevolent supply and demand outlook. But since about 2006 S and Ds aren’t the main factor with commodity prices, even if they have an important inter-commodity influence. Eighty percent of the price path of ag commodities, like everything else, is coming from the general direction of markets. Right now that’s downward, so it’s no fun. It’s why I’ve been bearish.
A good description of this split situation is contained in the CWB’s PPO Updater newsletter this week, in which board analyst Neil Townsend – always a pleasure to read – sums up and analyzes the generally good S and D outlook for cereal grains, but then goes into a discussion of the negative mood underlying the world markets, with multiple economic problems around the globe not getting better. The interplay of crop S and Ds with the dominant world economic zeitgeist is what will determine prices, but it’s rather hard to predict these days.
This morning on Bloomberg, Nouriel Roubini said he believes the U.S. has a more than 50 percent chance of slipping back into recession this year. That won’t be good for crop and meat prices, for the reasons I detailed briefly in my blog entry on Monday, somewhere in the middle of that intemperate rant against Tea Partiers, both of the 18th century and today.
Forecasting crop production numbers is a perilous game, but it can be done with some basis. Guessing the world demand for those crops six months from now is a much shakier proposition, at least in this tortured world economic climate. But it’s the more important part of the S and D equation right now. And utterly unknowable.
