Global, Macro Markets and Why Farmers Should Care It wasnt that long ago that being a trader on the floor meant you could have a certain expertise and rely on that for your career. Maybe it was deliveries, maybe it was weather, or maybe you just had an incredible knack at calling the market given all the relevant inputs. Those days are over. I think I first noticed a shift over the financial crashes of the late 80s and 90s. It seemed my product was being influenced, unduly so, by outside factors I didnt quite appreciate or understand. It was then I made a pledge to myself to at least arm my decision-making process with what is happening around the world - global macro. Its a great topic because I cant remember a time where we have had so much global tumult. What can affect our grain prices here in Chicago other than the obvious weather, supply, and demand? The first thing that comes to my mind is money flow. I think everyone would agree that the money we have seen pour into commodity funds over the last 15 years has been unprecedented. We can have bearish weather patterns, but the agricultural markets may rally as we see foreign investment plow into Chicago, looking to give their clients an enhanced return on their money. Why would this be? Take for instance the last seven years. As the stock market plummeted and scared everyone away, the FED cut interest rates to zero in order to boost investment and spur on the economy. This was to hurt savers and steer their capital to investment managers to find a yield better than 0%. Some sought solace in buying the 10-year Treasury Bond, which by some circles is the benchmark that a saver could, at a minimum, expect. Today that rate is about 2.50%. Yep, 2.50% on your money that you lend to the government for . . . 10 years! Remember the late 1970s and early 1980s? Interest rates on your car loans were over 18%. The outside money came fast in hopes of quick returns for their customers. It was a crazy time, and we saw corn move toward $8.00. We heard words like new paradigm and we will never go back to $3.00 corn again. Dont look now, but that just happened. Why? Fast forward to today and the landscape has changed again. The stock market has yielded stellar returns. Interest rates are set to go up (even though I dont think they should) and corn is trading at $3.25. The money left as soon as it came. With outsized returns elsewhere, the fickle fund managers followed the lemmings over the cliff back to the fixed income world and the equity world. There is nothing inherently wrong with this, its just the world we find ourselves in today. That is why you can be bearish or bullish for all the right reasons, yet get carried out of the market on a stretcher because you didnt see the fund money coming. Sometimes, I call it Funny Money because that is how it feels some days. Sometimes the threats come from overseas. The strength of the dollar, something that has helped prices plummet as of late, is a constant input and concern. While other countries try and rescue themselves from some of the same problems the U.S. economy has gone/is going through, they may weaken their own currency by printing money and putting it back into their own economic system. In turn, this will make the dollar look stronger - hurting us again at the global marketplace. Other overseas threats can manifest themselves into different problems for us at home. Currently, the Russian/Ukraine problem, I think, represents the next biggest threat to our marketing plans at home. Russia is a powerful country when it comes to energy and commodities. If they begin to use some of that strength against the EU or U.S., we could see a further weakening of the European economies. Why does this matter? We do a lot of trade with the EU, and if their economy sinks any further, we will see some monetary fixes by their central bank. As a result, that could weaken the euro and make the dollar look stronger, yet again. If this is the case, the euro economy will be suffering and, as a major trading partner, the negative corporate impacts will be felt across the pond. This recent round of mergers/acquisitions by U.S. companies with companies abroad for tax purposes only goes to show you the extent of the global village. Oil is affected with the problems in the Middle East and ISIS. Gold can fluctuate with the dollar as well as any other global conflicts. Apparently, the wealthy are buying actual gold bars right now as they deem the world to be in a state of crisis never seen before. I think they are wrong, but gold bars are flying out of the vaults. The threats are from any global macro situation area lurking behind every corner. While I dont think it is possible to be an expert on everything, I think that it is possible to teach yourself to be your own head coach. To further that coaching analogy, be aware of the defenses and use the help around you to make a game plan that is suited for todays competition. To just be an expert at the passing game and not take into consideration anything else can leave you on an island and vulnerable to adverse movements to your portfolio and your P&L.
Posted on: Thu, 06 Nov 2014 18:40:17 +0000
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