Agriculture and the “fiscal cliff”: Part 2

In what may be the single most significant factor affecting the very near future of the U.S. economy, the oft-referred to “fiscal cliff” is looming on the horizon. We asked some experts in the field of agricultural economics to provide their take on how agriculture, in particular, could be influenced. We will be sharing their responses in a three part series. Here is the second response from Mike Zuzolo, with Global Commodity Analytics and Consulting, LLC.

Much like the financial markets, commodity markets are primarily driven by risk-takers and international trade, in my view. Further, these two drivers to the markets are intertwined; they should not be separated.

Mike Zuzolo

Mike Zuzolo

Much of what drives both risk-takers and international trade hinges upon the conviction or confidence of the markets, in my estimation. Increased expectations for stronger global growth and increased capital movement across borders to invest lend the financial and commodity markets to a “risk-on” attitude, whereby these markets are willing to take prices higher, generally speaking, on the idea that both capital an d international trade will continue to increase.

If the so-called “fiscal cliff” is not resolved by our political leaders in Washington, D.C., the Congressional Budget Office forecasts that the U.S. will fall back into recession in 2013. Therefore, if the “fiscal cliff” were not solved by early 2013, I believe the financial and commodity markets both would begin to price-in reduced international trade, and return once again to a “risk-off” attitude — similar to the one seen in the Fall of 2011. In that time period, the markets increasingly expected the European Union’s debt crisis to worsen and spill into other European countries.

But unlike the Fall of 2011, when the Dow Jones-UBS Agriculture Commodity Sub-Index fell 26% from its August high to its early December low, a return to a U.S. recession in 2013 is likely to push the EU (and even possibly China) back into recession as well, in my opinion (I’m defining a Chinese Recession as one which GDP falls below 6% because that is where growth at that level would likely increase unemployment similar to that of previous financial crisis.) In other words, a U.S.-led recession in 2013 has a strong likelihood of bringing about a global recession, in my estimation. A scenario like this isn’t a friendly scenario for capital flows, for international trade, or for agricultural commodity demand. Further, under this scenario, I think it’s important to consider the potential that a similar percentage decline in the DJ-UBS Agriculture Sub-Index could occur.

There is a caveat to this in what I would call a “near worst-case scenario.” Because the U.S. Dollar and U.S. Bonds are unlikely to be safe-haven instruments for risk-takers in the financial and commodity markets as they were in 2011 (since the U.S. is leading the declines in growth and the cause of this potential global recession), one could raise the possibility that the best “safe-haven” under this circumstance would be gold. If gold is a safe-haven instrument, do other tangible commodities, such as grains and oilseeds, feel support from this? Does the financial and commodity market perceive all hard-assets such as commodities as supportive due to gold? In today’s inter-connected, interdependent global economy, this is not something I am planning or counting-on for my clients and subscribers in 2013.

The information and data contained herein was obtained from sources deemed reliable. Their accuracy and completeness is not guaranteed. Any decision to purchase or sell based upon such information is the responsibility of the person authorizing the transaction. Prices could already have factored-into them the seasonality or cycles of the market. Copyright, 2012 Global Commodity Analytics & Consulting LLC

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