Fourth of July holiday offers chance to reflect on factors

by Editorial Staff
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The Fourth of July weekend came and went. The traders and investors reflected on the world’s economic prospects. The "green shoots" had died. The crude oil price dropped about $10 per barrel. The stock market began to pay more attention to the towering wave of U.S. government debt moving to market to finance an assortment of "critical" spending priorities — stimulus, cap and trade, health care reform card check to name but a few — than to the withered "green shoots."

Also in the time period, the state of California — the United States’ canary in a coal mine state — began to cough and spit out I.O.U.’s instead of payments to a series of vendors. The corn and soybean markets also had a post Independence Day revelation. Yes, the crop was in late, both corn and soybeans were being put in the ground in June. But the weather had been benign with ample moisture in most areas of the United States, warm weather and basically ideal growing conditions.

Around the world it rained a bit in Australia. In Argentina, the growers received some rain and made planting decisions for growing more grain. Meanwhile animal production agriculture — beef, dairy, pork and chicken — have not been experiencing the positive returns with major producers reporting severe financial losses and some filing for bankruptcy.

The corn market began to reflect all of those factors. The price that had reached the $4.70 per bu range began to plummet with the December contract falling to $3.35 per bu on July 7. The collapse of grain prices was even more profound in soybeans where November futures prices fell over $1.50 per bu — a post July 4 holiday price collapse.

It is not clear that this price decline is over. During the week the new head of the Commodity Futures Trading Commission (C.F.T.C.) was talking about holding hearings on position limits for crude oil traders, including long-only funds and sovereign wealth funds. The impact of this statement sent the oil markets to worrying about a huge change in market participation. By extension the grain markets cannot be far behind in scrutiny because they too have long-only funds holding positions in those

markets. The shock waves sent through the market by the new C.F.T.C. head announcing that "he was from the government and he was there to help" may create dramatic ramifications both short-term and long-term for U.S. and world futures trading.

The corn market also was impacted as falling gasoline prices put downward pressure on ethanol pricing. Fortunately for ethanol producers, a rapid decline in net corn cost might allow volume growth in ethanol sales as cost pressures subside.

Perhaps it is possible that a muting of the food versus fuel arguments also will subside as farmers attempt to grapple with declining incomes from grain sales and ample stocks. This price decline, were it to continue, also potentially would impact farmland values. The solid value of farmland in recent years has stood in stark contrast to the residential and commercial real estate markets.

A dramatic reduction in farm ground prices would not be a welcomed addition to the current financial picture.

For corn sweetener suppliers, lower corn prices also enhance export opportunities especially to Mexico where tight sugar supplies are expected. However, U.S. and Mexican sugar import policies will play an unknown role as the old crop year comes to an end and new crop begins in Mexico and the United States.

For the moment good weather, and the threat and/or reality of government intervention in the futures markets, perhaps limiting long positions, will have the sweetener markets in the United States on edge. It is unlikely the C.F.T.C. can stop with investigating oil trading and position limits, but it will be important for the government to note whose ox farmer, food processor, banker, etc., is being gored by any proposed new regulation.

This article can also be found in the digital edition of Milling and Baking News, July 14, 2009, starting on Page 19. Click here to search that archive.

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