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Testing the lows

Agriculture.com Staff 02/19/2009 @ 9:35am

Grain markets seem intent upon testing the lows made in late fall, with corn headed towards $3, beans $8, and wheat $4.50. It has been nothing but losses that have been registered in the grains since the Feb. USDA report confirmed problems in South America production. But in spite of the South American crop problems, prices keep drifting lower. Why?

We are following the financial markets lower, and the sad state of affairs in the world economy right now that have left all markets depressed and in a negative mindset.

Rather than a battle for acres, we are having this spring a battle to try to keep demand levels at decent amounts due to the slowing US and world economies. The only way prices seem comfortable in doing that is to move lower. The negative mindset of the whole world right now when it comes to anything economic is actually quite negative, and it is definitely being reflected in the markets recently.

What will it take to end this negative mindset?

We need some confirmation that economic recovery is on the way or has already started in order for the markets to reverse their current negative psychology. So far, we do not see any concrete sign of that occurring. Right now, money is not flowing into investment or new projects. Instead, money is flowing out of all things economic, with new layoffs and more capital problems in many areas of our economy.

Bottom line? Money is still looking for safe havens, waiting for the deflation to end so that is can buy up assets at depressed levels. This money on the sidelines is likely to not be attracted back until it knows that the deflation continues.

And who can argue with the success of that strategy over the last 9 months? Today, cash can buy about 40% more stock than it could just 9 months ago, and also buy 20-30% more house than it did in not much more time. It can buy almost 4x as much oil and more than 2x the grain than it did just 9 months ago. And to acquire all this extra property, there is no tax obligation due!

When there is more money by holding value in cash than any other investment in the world, the capital incentive is to keep it in cash. That doesn't generate any positive return or strong GDP numbers for an economy, and doesn't generate any tax revenue for governments anywhere in the world. Deflation is not an ideal environment for an economy in any country -yet that is exactly what we have today.

Until markets stop deflating, things will remain negative for the time being. So down we continue to go, searching for the lows.

The information contained, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. The opinions and recommendations contained are based on our judgment and do not guarantee that profits will be achieved or that losses will not be incurred. Recommendations should not be construed as an offer to buy or sell commodities. There is substantial risk of loss in trading futures and options on futures.

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