Economic conditions weigh on the grain markets
Over the past ten days, most commodity markets have been on the slide with worries about economic conditions in the U.S. and (more importantly) in Europe. As growing concerns over governmental debt and unemployment rise, investors are shedding positions and looking for a safe haven. Gold futures continue to move higher and the rest of the world now views the U.S. as more of a stable environment than Europe, with the U.S. dollar reflecting strong gains over the last three months.
Since 2005, we have talked about increased volatility in the marketplace as world supplies in grain and inventories were approaching three-decade low levels, and world economies were growing. The need for increased food and protein would be paramount. The market saw significant increases in volatility due to a stronger speculative presence and a more defined use of commodities from the food, feed and energy sectors. On top of that, a volatile energy climate sent crude oil prices shooting well over $130 per barrel and volatility reached all-time high levels. Since then, the markets seem to be gyrating more into a mentality that steep rallies are less likely and prices will find themselves in a sideways to lower trend a majority of the time. While that appears to be happening, we still believe that volatility will be especially highlighted in the grain markets over the next few years.
So while crop planting conditions and good moisture for the Midwest are aiding the downturn for row crop prices, keep in mind that it is a long growing season, and conditions need to remain near ideal in order to produce bumper crops. Therefore, while the markets have taken a setback this past week, their overall trend has been down since January. The silver lining here for grain producers is that, as prices cheapen, the wheels of demand begin to turn more aggressively. Speculative interest will take note as well. The cap above the marketplace, however, is a feared an economic meltdown in Europe. This could lead to a repeat of the December 2008 time period when the commodity and stock prices went into a tailspin.
While an economic meltdown is a possibility, we do not see the variables in place to see a repeat of 2008. Yes, the economies may be sluggish; yes, demand may not be as strong for commodities as it might have been in better economic times; yet the need for commodity products will not change significantly. Therefore, prices will find their bottom soon and the market may, in fact, begin to worry more about weather. Until then, the combination of "good enough weather" with economic concerns will be enough to keep the lid on prices.
If you have questions or comments, contact Bryan Doherty with Top Farmer at 1-800-Top-Farm, Ext. 129.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.