Todd's Take

By Todd Hultman
DTN Cash Grains Analyst

On Oct. 8, December crude oil posted its lowest close in over a year with growing concerns that plenty of oil production is flowing at a time when the economies of Europe and Asia are slowing. There was talk that Saudi Arabia might not act to support oil prices and the selling in oil spread to the stock market. Over the next six trading days, the Dow Jones Industrial Average slid 5%, causing one commentator to say that a new bear market was beginning.* It was fair to wonder if the new bearish shock would also spread to grains.

As it turned out, October’s mini-panic was short-lived and there was no significant impact on grain prices, but some nervousness was understandable as many still remember how hard grain prices were hit in the financial collapse of 2008. In that year, December corn fell from a peak of $7.88 a bushel to $3. November soybeans fell from $16.35 to below $9. The large drops had little to do with the supply and demand of grains, but came instead from fear and contraction in the financial markets, a different kind of risk for grains.

Fortunately, this is not 2008 and the current threats in the financial markets are low. The U.S. economy is showing modest growth with a low inflation. Jobless claims are trending lower and the Federal Reserve’s monetary policies remain accommodative. Cheaper oil prices will hurt some oil stocks, but are actually bullish for the larger economy. Even though the Fed may raise rates in 2015, the increases are apt to come in small steps and will only proceed as long as the economy is doing well. There are risks in the world — conflicts in Syria, Iraq and Ukraine; possible deflation in Europe and slower growth in China — but so far, those risks are not interfering with U.S. growth.

When it comes to marketing grain, what is the best way to handle these scares that come from other markets? The first and obvious answer is that situations like this are what risk management is for. Risk comes from many directions and, as I wrote on Feb. 19, markets always have "More Risk Than We Think." Protecting unsold grain from the risk of loss with early sales or put options is good practice no matter where the risk comes from.

Second, it should help to know that non-grain concerns from other markets rarely have much impact on grain prices. For example, if you really want to know how corn prices will behave in a certain situation, pay attention to the price of corn and don’t become distracted by all the other hype. Even if commentators are right and stocks are due for a sell-off, that doesn’t necessarily mean that grains will go lower also.

Looking back over the history of corn prices and the stock market, the two obvious times when contraction in the financial markets brought about significantly lower corn prices were 1929 and 2008, but of course those examples were extreme and rare. Statistically, the correlation between corn prices and the Dow Jones Industrial Average is loose. Going back to 1980, the two prices show a correlation of +0.47, meaning that they tend to track in the same direction, but not too closely. Look at prices over the past year and we get a different correlation of -0.37. This means that stocks had little influence on corn prices and the two actually tended to trade in opposite directions.

Aside from statistics, a few specific examples show us how these things usually go. The king of market sell-offs was Oct. 19, 1987, when the Dow Jones Industrial Average dropped 23%, the largest percentage loss for any day in history and happened after U.S. Treasury Secretary James Baker III threatened to devalue the dollar. December corn prices finished down a modest 6 3/4 cents that day (-4%), but recovered the next day and never showed much concern after that.

Stock prices also suffered after the dot-com bubble peaked in January 2000. Three bearish years later, the Dow Jones was down 30%, but spot corn prices were up 15%, helped by hot and dry weather in the summer of 2002. Finally, another bearish sell-off occurred in May and June of 2010 when the Dow Jones lost 11% of its value in the aftermath of the flash crash of May 6 — an avalanche of selling that was exaggerated by high frequency trading. Once again, December corn remained poised, falling only 3% in those bearish two months before turning higher for the rest of 2010.

The valuable lesson here is to stay focused on the price action of the grain that you are following. In this month’s example, as stocks were falling from Oct. 8 to 15 and commentators were talking about the start of a new bear market, the price of December corn held steady to higher. Had corn prices broken to new lows, the bearishness could have been taken more seriously, but as it was, there was no reason for alarm in corn. Markets have a way of pushing people’s buttons and getting them to panic at the wrong times. Stay focused on the grain that you are following and you will come out ahead of the crowd.

* "Gartman admits getting ‘bear market’ call totally wrong" at…

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