Farm prices and profits have been impacted by the recent volatility in global equity markets, but there may be a silver lining. The August crash in the sub-prime mortgage, and the hedge fund debacle associated with it, has investors looking for steady footing on shaky ground. The U.S. stock market, as measured by the Dow Jones stock average, fell by 6% in early August in just five days. This created major turmoil in the credit markets and took values down in the shares of major lenders.
To stabilize the financial markets, banks from around the world pumped billions of dollars into the system the second week of August.
During the second week of August, the European Central Bank pumped in $130 billion one day and $84 billion the next. If you add in the $38 billion from the U.S. federal government, $8.5 billion from Japan and even $4.2 billion from Australia, you can see the massive amount of money it has taken to keep all of the firms solvent — at least until they are sold or liquidated in an orderly manner.
What is the short-term impact on commodity prices and farm profits? It has been too negative for grain prices and has really increased market volatility. The hedge and investment funds that were losing billions of dollars in the sub-prime mortgage markets had billion-dollar margin calls. When hedge funds get on the wrong side of these huge positions, they will often sell. The result: Liquidate long grain positions and generate all of the cash you can today.
What is the long-term impact on commodity prices and farm profits? The flood of money into the system is likely to increase the rate of inflation over the long term. Whenever investors lose money on risky financial bets they usually return to safer, real investments like commodities, real estate and secure low-risk investments.
You may lose money on sub-prime mortgage investments, but if you buy soybean futures at least you have some beans. Seriously, many investors will go to the security of 5- and 10-year government-backed bonds or high-quality mortgages. With virtually no defaults on farm loans or mortgages in the last three years, ag loans and mortgages are viewed as a safe haven. In general, as bond prices go up, long-term mortgage rates will decline.
What to do? Stay with your written marketing plan that spreads your sales out through the year. Use this dip in long-term mortgage rates to lock in long-term, fixed-rate money for your farm, before inflation or the fear of inflation drives long-term rates up.
As an example, the day after August 10, USDA crop production and supply-demand reported the bullish soybean projections were ignored by the soybean market early in the day. Shortly after the opening prices fell sharply lower by as much as 20¢/bu., the CBOT soybean futures market was flooded by early hedge fund selling. By the close of the day, futures prices were 8¢ lower, and with a 10¢ improvement in cash basis bids, most farmers had higher cash bids by the close on Friday than the previous day.
Lesson learned. Do not panic if you have a good written market plan in place — you have the ability to wait until the Wall Street wizards get washed out. For livestock feeders this hard price correction set up a great buying opportunity.
Alan Kluis is the president of Northland Commodities LLC, based in the Minneapolis Grain Exchange, Minneapolis, MN. You can contact him at [email protected] or call toll free 888-345-2855.