By Jeff Fichtelman, partner in JP2 Risk Management
If you polled the average American, most would agree we are likely to enter a recession. Thanks to the loose monetary policy from the Fed and the White House, we are now dealing with rapid inflation. This inflation has increased corporate costs, reduced their margins and is hurting consumer’s ability to spend. What does this translate to? Lower revenue and income for many corporations and therefore lower stock prices.
Why should the U.S. farmer care about the stock market? In most cases, the price of corn and soybeans move independent to fluctuations in equities. However, in those rare circumstances that the equity market is “in free fall” all markets suddenly move together. In the 2008/09 recession, the stock market fell 20% while corn and bean prices actually went higher. Then, equities fell another 30%, which ended up dragging corn and bean prices down sharply. Why? Because the big speculators who buy corn futures also buy equities. When they are getting crushed in the stock market, they sell “what they can, not what they want.”
All of this worries me some (as of this writing in early May) because corn is sitting near contract highs, currently $7.40, while equity markets are hurting badly. Pair this with massive spec length in corn and soybeans and you have the recipe of a bad stock market impacting grains. I am concerned that:
- The stock market will break into new lows in early May and, if so,
- It will drag corn down with it? If 1 happens, I would bet 2 will as well.
Here is the stock market status as of May 2….
Be careful if you have too much unpriced grain at these high levels. Be wise, take good profits but also understand how crop insurance is there to protect in case of a major drought and even higher prices (depending on your coverage, please talk to your agent).
For more from Fichtelman, visit grainbull.com.