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What Impact Will The Falling Stock Market Have On Grains?

Next week, the Dow's performance should be telling for ag markets.

The stock market has had a very sharp correction lower the past week, and has the financial world in a buzz. 

Worries about higher inflation and interest rates seem to be fueling this break.  The stock market has seen a sharp correction lower of the DOW of almost 3500 points from the high Jan. 29 (26,584) to the low overnight on Feb. 6 (23,088 is the low so far).  That is over a 10% correction from high to low, and is certainly getting the attention of the marketplace!  

Fears of spiking inflation and higher interest rates (which translate into borrowing costs) have pushed many investors to rethink their bullish outlook on stocks.  Earlier this year, money was piling into the stock market as people clamored to participate in a stock market that has been rising sharply since the election.  Now, investors are rethinking their position after Monday's (2/5/18) loss of 1175 points on the DOW, or about 4.6% lower on the day. 

The loss eclipsed the one day record of 778 points loss during the 2008 financial crises.  

But the DOW was at a much lower level, so the decline didn't even make the top 20 biggest percentage drops for the DOW.

So the stock market break looks more like a correction than a long term trend change, especially when you consider the recent strength of the US economy, with good GDP economic growth recently, relatively low unemployment rates and strong employment statistics, and growing US household incomes.  One firm pointed out that the market has performed well when interest rates were rising historically, so that was a poor reason to be selling stocks today.  

Pres. Trump, through his press secretary, Sarah Sanders, was quoted as saying "The President's focus is on our long-term economic fundamentals, which remain exceptionally strong, with strengthening US economic growth, historically low unemployment, and increasing wages for American workers".  Of course, this is what any President typically will say when the US stock market falters (at least that's what he should probably say).  

Generally, a lower stock market will put pressure on all markets, especially during a correction as deep and quick as the recent one week break.  We still don't know how deep or long this stock market break will last, but often times a quick break in a bullish stock market rebounds rather quickly as well, and ends up being a buying opportunity in a bullish stock market.  

Ironically, the stock market break is supposedly tied to the strong U.S. economy, and expectations that higher interest rates and inflation will emerge that will hurt the economy. 

World stocks are following the U.S. market lower, although some argue that the world economy is not as strong as the U.S., and therefore is not as susceptible to higher interest rates and inflation.  

For the grains, the focus is still on South American weather and its impact on the eventual size of the Brazil and Argentine crop. 

South American weather forecasts have actually improved recently, with a bit more rain in the Argentine forecast in the past few days.  Of course, this is a critical time in the development of the Argentine crop (just like August in the US), so some yield potential could still be recovered if adequate rains fall this month.  But there has also been some irreversible damage, with the past few months drought (warm and dry weather). 

Brazil weather has been much better, and will likely continue to be good, based on the recent forecast which calls for more cool and wet weather for the entire country.  So, the weather pattern which has been favorable in Brazil and unfavorable in Argentina the past few months is forecast to continue.  That will likely lead to a good crop in Brazil, and a below average crop in Argentina.  

By next week, we should have a better idea how the stock market break is impacting the grain and livestock markets.  If it has stabilized, the focus will go back to the fundamentals of the grain and livestock markets, and not the outside markets.  

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Feb. 19th - Fargo, ND - 9:00am
Feb. 20, Glen Ullin, ND, 2 pm.
Feb. 21, Grand Forks, ND 5:30 pm.
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Call the office at 800-450-1404 for more details.

Ray Grabanski can be reached at raygrabanski@progressiveag.com.  
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Ray Grabanski is President of Progressive Ag Marketing, Inc., the top Ranked marketing firm in the country the past 8 years. 

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