The Fed's Rate Decision and How It Will Affect Grain Prices
Jan 26, 2012
The "Outside" markets are adjusting to statements made by the US Fed. In case you missed it the Fed announced yesterday that they will leave rates "unchanged." Bernanke and crew also stated they expect to keep rates at extremely lows levels through late 2014.
Reading somewhat between the lines and listening to the Bernanke rhetoric I have a strange felling the Fed is still tremendously fearful of "deflation," and QE3 is a definite possibility. This has forced me to completely change my view on the US Dollar. As I have learned in the past few years, if you can get the US Dollar right, you'll get a lot of other things right. Most of you know I was "bullish" the US dollar heading into 2012 on thoughts of a complete fallout in Europe, and more "money-managers" searching for some type of safe haven shelter. My how quickly things change. Now I am no longer "bullish" the US Dollar, but I have quickly become "bearish." You can call it flip-flopping or what ever you like, this is what happens though when you get massive government intervention in the markets. They have an uncanny way of shortening investment cycles and amplify market volatility. Fiscal and monetary policy changes can change the direction of a market faster than I can flip a coin.
The way I see it the Fed wants to spark inflation in an effort to try and create growth, rather than simply letting the market play itself out. You can see for yourself, the past few months when the government has stayed out of the markets, inflation has subsided, the US Dollar has strengthened and the Stock market has rallied. Unfortunately, like most government officials the Fed can't leave well enough alone. They don't feel they are doing their job unless they are doing "something" or making some type of change or adjustment. This has me worried to say the least. I am worried that they are tampering with something that could throw a monkey wrench in the entire operation. If they want "inflation" I am assuming that is what they will eventually get. That means a lower US dollar and higher commodity prices. That also eventually means slower growth and a less bullish stock market. I am also feeling that the political machine in Washington is starting to take on a more "Manufacturing" type policy, which also equals a weaker US Dollar and more inflationary type environment. With this in mind I will be pulling back my US Stock Market rating to neutral, and flipping my US Dollar rating to "bearish!"
The European Central Bank (ECB) is under some fire to take "haircuts" on a portion of the Greek debt it currently holds, but they seem very apprehensive. Word in the trade is if the ECB would eat some of the losses it would make things much easier on Greece. The market will be closely monitoring this situation, if the ECB steps up to the plate and takes the hit, the market may soon become more at ease with the entire debt crisis, and we may actually see the European stocks rally and the US dollar fall under additional pressure. Essentially providing us with some additional "risk on" type movement.
Wheat is turning more "bullish" in my opinion and therefore I am moving from a "neutral" type stance to a more bullish tilt. The bears will want to adamantly argue about global supplies and record carry, but I see several new bullish type cards being added to the deck that we need to respect and account for. First and foremost I would be apprehensive being aggressively short the CBOT wheat contract simply because the funds are leaning so heavily over the bearish side of the boat. With the funds short almost 45,000 contracts and thoughts that the UK winter wheat crop might be in trouble, and an estimated 25% of the Russian wheat crop will soon be facing potential winter-kill issues as a major cold front moves in makes me feel that we have some additional upside potential. You also have to factor in that US wheat is quickly becoming more competitive in price on a global scale, and it might actually start winning a little bit more global interest. There is also more talk circulating in the trade about the dryness occurring in the Canadian Prairies. Let's not forget US weather issues will soon be a topic of conversation in the winter wheat market during the next 30 days as well. Bottom-line, I see more upside potential in the wheat market than many might be estimating.
Soybeans are facing some stiff "fundamental" debate as many in the trade try and digest or determine the extent of the South American crop damage. With more rains forecast for South America, along with it still being fairly "early" in the crop cycle, the question is how much soybean production will ultimately be lost. Several days ago the trade was thinking the USDA could be 15MMTs too high for their South American soy production estimates. Then the trade seemed to backpedal to a reduction of around 10MMTs. Now I am hearing, on thoughts of more rain, the USDA may only be 7MMTs too high (some estimating a loss of 2MMT in Argentina, a loss of 2MMT in Paraguay, and a loss of 3MMT in Brazil). The bottom-line is no one really knows. There are mixed reports and mixed stories circulating through the trade quicker than the market can digest the data. The next couple of weeks will obviously be more telling and some of the more extreme estimates will more than likely be shaken out.
Soybean demand is also falling under heavy debate. Not only are traders trying to guess at supply-side estimates, but also demand-side numbers now as well. Currently, many in the trade believe the USDA has total soybean demand overstated. The question is by how much? If we are overstated by the same amount that we have lost in South America then we have the makings of a "Mexican Standoff," and no real reason to aggressively add premium to the soybean market. If however the USDA is correct and we do end up with 7-8MMTs of additional global demand then we may in fact end up being extremely tight. My guess is in typical trade fashion we will push to the extremes in both directions. The "bears" will UNDER-estimate the production losses as well as overall demand, while the "bulls" will OVER-estimate the crop losses and overall demand. As "risk managers" it is our job to recognize when the market is pushing to the extremes and then capitalize on these movements. Don't get caught up in trying to defend, predict or determine the number, rather focus on playing the game. In other words, leave the scorebook and the stats to those sitting in the stands.
Smart money right now is starting to think the market is "overestimating" the extent of the damages in South America soy, along with "overestimating" the growth in demand that many (including the USDA) have penciled in for 2012. With this in mind I would strongly urge you to get caught up on your new-crop sales.
Just wanted to tell everybody about our Grain Marketing Seminar we are having at the end of February in Kansas City, MO. You can come and hear me give my Outlook on crop prices for 2012 as well as hear some of the biggest names in the US Grain trade, Global Grain analysis, US ethanol industry, and more.
Click this link to find out more Grain Marketing Seminar 2012. Like this blog and want to read more, sign-up for our free trial of the daily report. Click here