Boom-and-Bust Economic Cycle Looms
Oct 24, 2011
Why is there so much gloom and doom in the grain marketplace?
In two words, it’s the outside markets. The continued debt crisis in Europe, anemic job growth in U.S. and the resulting slowdown in China has many worried about future demand. Essentially, we are entering the dark side of the boom-and-bust economic cycle.
We are now in a downward spiral of slow economic growth, along with high private and governmental debt exposure that saps consumer and government disposable spending, resulting in slow job growth that leads to less tax revenue.
Talk of a double-dip recession is giving way to concern that we could actually be looking at something much worse—the big “D.” The end result is fear, which is becoming a force in the market whose effects are difficult to predict.
Subsequently, we are now in a time period when the supply and fundamentals for corn and soybeans are still important but will indicate only about 40% of the price direction.
I’m inclined to believe that for the next six months, the pink elephant in the corner will be the direction of the outside markets. If the Dow makes new lows, the funds and professional speculators will be forced to move aggressively to the sidelines.
As a result, at least in the short term, it could be extremely painful for a net long. Long-term, we should get values down to levels where demand will be stimulated and production discouraged at a time when we actually need the opposite.
The upshot is that the lower the market goes in the next three months, the more likely the chance that demand will stabilize and then increase while supply is still tight, leading to a dangerous upside price event.
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