Bubble Buster for Grain and Row-Crop Commodities

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The other day in Spokane, WA, it was a treat to listen to Ed Seifried of Lafayette College address an Ag Executive Summit made up of ag producers and CFOs of agribusiness firms. This represents the 17th year of this program, sponsored by Northwest Farm Credit Services as a tool to educate their customers. Both Ed and I have been on the speaking circuit for a number of years, during which I have built much respect for his opinions.

Ed indicated that the perfect storm is brewing for agricultural grain and row-crop commodities. The first element of the perfect storm is the end of quantitative easing round II, which is scheduled to end in June 2011. The second element is oil prices and the possibility of a spike in oil prices, which ripples through fertilizer, fuel and other costs, resulting in margin compression. The third and most crushing attribute would be the rise of interest rates.

According to his analysis of interest rate futures on the Federal Reserve rates, some interesting scenarios could occur. There is a 70% probability that the current Fed Funds rate at zero would rise 25-50 basis points by November 2011. There is nearly a 60% chance of a 5-75 basis-point increase by January 2012.

The current inflation reports in the U.S. and abroad provide interesting scenarios for all three of the events occurring. I would concur there is caution, but Mother Nature, that is, weather, or an unusual “black swan” event could accelerate or modify the impact on the commodity bull market.

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

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