By Jeff Fichtelman, Partner at JP2 Risk Management
If you ask the average American, most would agree that we are likely to enter a recession. Thanks to the accommodative monetary policy of the Fed and the White House, we are now facing rapid inflation. This inflation has increased business costs, squeezed margins and hurt consumers’ ability to spend. What does this translate to? Falling revenue and revenue for many companies and therefore falling stock prices.
Why should the American farmer care about the stock market? In most cases, the price of corn and soybeans moves independently of stock movements. However, in those rare circumstances when the stock market is “freefalling,” all markets suddenly move together. During the 2008/09 recession, the stock market fell 20% while corn and bean prices actually rose. Then the shares fell another 30%, which led to a sharp drop in corn and bean prices. Why? Because the big speculators who buy corn futures are also buying stocks. When they crash on the stock market, they sell “what they can, not what they want”.
All of this worries me a bit (as I write in early May) because corn is near contract highs, currently at $7.40, while equity markets are hurting badly. Couple that with massive spec length in corn and soybeans and you have a recipe for a bad stock market impacting grains. I fear that:
- The stock market will hit new lows in early May and, if so,
- Will he take the corn with him? If 1 happens, I bet 2 will too.
Here is the stock market situation 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 you in the event of a major drought and even higher prices (depending on your coverage, please speak to your agent).
To learn more about Fichtelman, visit grainbull.com.