Is Europe to Blame for Plunging Commodity Prices?

December 29, 2011 07:47 PM

Extreme volatility once again plagued commodity markets in 2011.

While several isolated outside events—including the tsunami in Japan, rioting in the Middle East, and the MF Global bankruptcy—contributed to the volatility, the eurozone sovereign debt crisis consistently surfaced to send commodity prices sinking then climbing on an almost daily basis.

“The EU has been a nightmare for traders over the last six months,” says Peter Georgantones, Abbott Futures, Minneapolis. “One day the news out of Europe is good and the next day another country is in trouble.”
Growing concerns over the soverign debt crisis in some EU nations have made eurozone banks less inclined to lend to each other as well as to businesses and households, which is pushing the European Union toward another recession.
The threat of recession in Europe has encouraged many investors to pull money out of the European Union and put it into assets elsewhere, particularly U.S. treasuries.
“When there is economic uncertainty in financial markets, the U.S. dollar strengthens, which puts downward pressure on commodity prices,” says Jason Henderson, vice president and Omaha Branch executive for the Federal Reserve Bank of Kansas City. “We saw it in the U.S. financial crisis in 2008 and 2009. There was a flight to safety, which drove up the value of U.S. treasuries.” The resulting strength in the U.S. dollar pushed commodity prices lower—crude oil prices in 2008 plunged from roughly $147/barrel to about $30/barrel within six months.

Recession & Volatility

In November, the Organization for Economic Cooperation and Development (OECD) cut its growth forecast for the European Union. OECD now expects fourth-quarter gross domestic product (GDP) to shrink 1 percent and growth in first-quarter 2012 to slide 0.4 percent.
“When Europe is in recession, the euro weakens and the U.S. dollar strengthens and that’s bearish U.S. commodities,” says Bill Lapp, owner of Advanced Economic Solutions, an agricultural economic consulting firm in Omaha, Neb. “Europe will continue to be in the spotlight in 2012, but it ebbs and flows, so I don’t think its impact is one directional by any means. We will see extreme volatility again in 2012.”
More than 20 percent of total U.S. exports are sent to Europe. “Europe is also a large source of demand for global products, so there will be some impact for the rest of the world if the European Union goes into recession,” says Henderson. But he doesn’t believe the impact will be as large as in 2008-09 when the United States plunged into its deepest recession since the Great Depression.
Lapp notes that over the past three to four years, agricultural commodity prices followed financial events more closely than they had in the previous two decades, which has made commodity markets more sensitive—thus more volatile—to even small changes in world economies.
Volatility doesn’t necessarily mean lower average commodity prices. However, it often means margin calls for hedgers and investors, says Michael Swanson, agricultural economist with Wells Fargo, Minneapolis. “The MF Global bankruptcy was connected to volatility,” Swanson says. “When prices drop or fall sharply people often freeze and do nothing.” Thus, Swanson says that volatility can result in large monetary losses.

Major Risk in 2012

“The European sovereign debt crisis will really shape financial markets in 2012,” says Henderson. If Europe comes up with a successful austerity plan, markets could stabilize. If not, money will continue to flow into U.S. treasuries, boosting the value of the U.S. dollar.
“The situation in Europe is going to be a huge albatross on commodity markets for the next several years,” says Georgantones. Both Georgantones and Henderson expect the word economy to slow next year and agree that the pending downturn will not be as steep as the global recession of 2008 and 2009.
Georgantones thinks the world situation is serious enough that corn prices could drop below $4/bu., soybeans could fall into the $9/bu. range, and wheat could slip below $5/bu. A glut of lower-quality feed wheat in the world and dramatically lower livestock numbers will also weigh on prices.
Swanson, however, isn’t convinced that all of the risk in 2012 will be to the downside. Europe could resolve its crisis, and growth there and elsewhere could accelerate, he says. On the upside, Swanson says $8/bu. corn, $18 soybeans, and $12 wheat are not out of the question, but neither are $3.25 corn, $7.80 soybeans, and $5.50 wheat.
Editor’s Note: Here at, we tried to identify what stories in 2011 will continue be top of mind in 2012. You’ll see one of these stories each week day until Jan. 3. Send any thoughts or comments on the stories to

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