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Bailout fails: What it means to the grain trade

Agriculture.com Staff 09/29/2008 @ 3:35pm

The future -- even the hours between Monday's market close and the opening of the day's trade Tuesday -- is as economically dark as it's been since the days leading up to the Great Depression.

Amid finger-pointing on either side of the political aisle, the U.S. House of Representatives voted down a $700 billion measure to provide federal financing for the troubled financial sector by a vote of 228-205. Before the House action, market-watchers said the bill's passage would have been bullish to sliding grain and crude oil markets.

The bailout's rejection kept corn and soybeans at the limit-down threshold, with the same being true for crude oil. The daily trading limit for crude oil is $10 per barrel. On Wall Street, the House bailout rejection triggered a 777.68-point drop in the Dow Jones Industrial Average, the largest single-day point decline in history.

"We are in uncharted waters right now, which means that information written this afternoon could be worthless by the time the Asian markets open tonight," said Cargill senior grain merchandiser Ray Jenkins Monday afternoon.

What's Moday's bailout failure in Congress mean to the grain trade? Without a financial bailout, money flow from outside investors for the grain markets will be a serious issue, CBOT floor traders say.

Matt Pierce, Futures International LLC, says a lot is riding on a bailout. Overall, no bailout is negative for agricultural commodities.

"Until credit institutions can get their ducks in a row, they are not going to be able to extend credit for margin hedges or any kind of speculative hedges that want to come into our market," Pierce says.

Meanwhile, there is a lack of inflationary concern, due to the lack of money flow into the equity markets. "When that happens, you will have less interest of money going into the agricultural commodities from outside or international investors."

There's widespread opinion the financial crisis is trumping the fundamental factors of the grain markets, floor traders say.

John Tock, a CBOT soybean futures trader, agrees this is a liquidation-type market. "It's the end of the month, end of the quarter, and people are taking their money out of funds. So, unless you think the whole world economy is going down the tubes, this sell-off in the grains is not about the fundamentals."

Barring some miracle overnight, the liquidation should continue, Tock says.

Where does the process go from here? Congress will revisit a proposed bailout package later in the week, officials say. The sooner the better, say farmerse and Agriculture Online Marketing Talk members. And, it should be well apart from the presidential campaign underway, they add.

"We have to support the bailout. We have no choice," says JonSCKs. "Replacing those who did this comes later. Not right now. Support what Congress has to do."

But, in the end, will a bailout have its intended effects? Some say no.

"You think the $700 billion Wall Street fatcat bailout, if passed, will stop the price of crude oil from declining? You think it will stop deflation?" writes Marketing Talk member 4wd2917359. "Do you think buying a stone-broke drunk a case of whiskey will encourage him to go to AA and get on the wagon?"

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