Short Term Impact of "Money-Flow" On the Grains
Mar 23, 2012
As I am sure you have noticed the past few days, I have become more concerned about the "short-term" growth prospects in the commodity sector due to a lack of interest coming from "money-flow." Obviously longer-term there is still the increasing demand for food, water, energy, raw materials, etc., that can not be forgotten... Unfortunately, from my perspective there is starting to be some mounting concern or a couple of speed bumps ahead that we need to acknowledge.
My thoughts are we might be able to attribute a large portion of the setbacks in "money-flow" to a change in global "leadership" that is scheduled to take place within the next 30 weeks. Not only do we have a US presidential election coming in November, but in October, China will head into a time of major transition as vice-premier Li Keqiang is expected to take over for the current Premier, Wen Jiabao, and the vice-president, Xi Jinping is expected to succeed President Hu Jintao as the party leader. Most tend to believe when a country goes through a transition of power from one person to the next, it can be fraught with tension and instability. History however generally shows that "new" party leaders tend to be focused on getting out of the gates quickly, suggesting that policies will move towards a position of growth once the new leaders are in place, but probably not before. It would be at this point that monetary policy may in fact shift towards lower interest rates and more aggressive growth. As you can imagine this environment could certainly be what the funds are eyeballing, as it would spark a fresh wave of fund buying and a push of "money-flow" into commodities. In the interim though we might see them singing a different tune.
A couple of analysts from Australia & New Zealand Bank seem to be on the same page, and actually doubt the Chinese government will launch any major initiatives to spur domestic demand by helping rural migrant workers or by reforming the big state industries that dominate energy, telecommunications and other fields. Instead, they expect a few programs here and there geared toward helping small business obtain loans, create jobs in the service industry and raise workers’ wages. Basically, the "bigger" stuff would have to wait until the new leadership settles in or the campaigns and elections have passed.
As leadership around the world starts to change hands, the funds may soon feel safer moving closer to the shore. Once all government guards and hired guns are perched back atop their "lifeguard" lookout stations, we may see money-managers moving back out into the deeper waters. As of right now, I am just not sure there is a ton of incentive for them to be swimming in the deeper rougher waters. From where I sit, the funds seem to be thinking there are plenty of fish to catch in much safer waters closer to shore! Especially since the government lifeguards look to be climbing down and taking a little break from their economic watch, essentially leaving no one to throw the markets a lifeline should the waters become violent.
One thing you have to remember, just because I have a more "neutral" opinion about "money-flow" it doesn't mean the Ag markets are going to take an immediate hit. I just want to make sure you understand we can still work higher, I just don't think we can work dramatically higher without the "risk-on" flag being waved across the entire commodity sector. Point being, ending-stocks could in fact move significantly lower while prices may not reach levels obtained in 2008 or 2011. Remember, the stars must ALL align to get the extreme moves to new highs, right now I just don't see that being the case.
Not only is the fund interest not firing on all cylinders, but we also have to realize, when considering total marketing year sales for each crop we are still running behind pace. Essentially meaning we could see strong US sales in the weeks ahead, but in the end see no real adjustments by the USDA in regards to the current balance sheet levels. Therefore smart money may view the "upside potential" as somewhat limited when compared to the "downside risk" that could be associated with disappointing sales numbers.
It is not that I am bearish, because there are still some bullish "wild-cards" in the deck that could push us higher, I am just thinking there is more and more limited upside potential as big money repositions itself.
The "macros" and "outside markets" are often just as influential to price direction in the grains as planting numbers and weather. I know as a producer, you may have questions as to how this pertains to your farm and your marketing. You can sign-up here to receive a FREE trial of my Daily Grain and Livestock commentary in which you will get where I stand on cash sales and some strategies on how you can take advantage of "Money-Flow." Just click here -