The 2009 Global Economic Recession and Agriculture
Expect a wild ride for the rest of the year.
By Moe Agostino
What a difference a year makes! In 2008, the livestock and grain complexes experienced new contract highs for many futures contracts. See the June 2008 CME Lean hog chart (Figure 1) closing at U.S. $100.20/cwt on July 3, 2008. We also experienced the July 2008 Chicago corn futures contract closing at U.S. $8.1575/bu on June 26, 2008.
One word, AMAZING! In the first half of 2008, we were all living in a very different world with global economic growth, global consumption of meats and grains on the rise and speculative money at all-time highs chasing the new vogue commodities. This year we are experiencing a global financial meltdown and recession. Markets are in turmoil, causing global economies to contract, demand and prices to fall, and investors and speculators to look for clarity from all the uncertainty. They hope for clarity from the daily economic indicators, the headlines or directly from U.S. President Obama and his dream team.
The volatility is unprecedented. Where is the Obama rally? The rally has fizzled and led to a 2100-point decline on the DJIA (Dow Jones Industrial Average) since the beginning of the year. Unfortunately, the outside markets, which are the equity markets, rule the day and have a major influence on all markets globally.
The negative bearish sentiment or psychology is being applied to all asset classes with the same brush. Supply fundaments are actually somewhat supportive of livestock and grain prices but not in the face of all this bad economic news. No one seems to care.
Remember, markets will bottom-out a lot earlier than when the headlines turn positive. No one rings the bell at the top or at the bottom. Greed took us into extreme highs in 2008 and fear is taking us to extreme lows in 2009 vs. 2008. Based on history and cycles, a retracement should point us back to a mean or an average and that would be somewhere between the highs of last year and the lows of this year. For example, the June 2009 futures contract could retrace back to U.S. $85/cwt. Likewise, the July 2009 corn futures contract could come back to U.S. $5.74/bu.
The question is: When will the global economy recover and is there enough time left for the two contracts shown here to move higher? It may not happen in 2009, but if economies do recover in 2010, a V-shape recovery could signal a recovery by the end of the year, a U-shape would be sometime in 2010 and an L-shape would put the recovery beyond 2011. Economists disagree when recovery will take place, and only time will tell.
Greed took us into extreme highs in 2008 and fear is taking us to extreme lows in 2009 vs. 2008.
- Moe Agostino, Farms.com Senior Risk Analyst
What we do know is that we are experiencing a very severe recession and the only difference from the 1930’s depression and today are the global bailouts of the banks. The markets will recover with time and no one makes money panicking. Fear will eventually drive toward panic rallies, so expect a continuation to the wild ride.
Prices have already factored in the most pessimistic of scenarios, so be patient as there will be better pricing and selling opportunities in the future. A lesson leaned from 2008 is to have a plan. As Boone Pickens likes to say, “A fool with a plan will always beat a genius with no plan.” If producers had executed a plan in 2008 with less emotion, and sold hogs or crops at the highs when greed and speculators were your friends, you could have profited handsomely. However, no one has perfect 20/20 hindsight. We can not change the past, but we can plan for the future.
Editor’s Note: Moe Agostino is a Senior Risk Analyst for Farms.com Risk Management. For more information on managing risk in your crop and/or livestock operation, contact Moe at: moe.agostino@farms. com. For more information, go to: www.riskmanagement.farms.com