Seldom is the price outlook for markets “crystal clear.” Most of the time the outlook is at least somewhat clouded. But that may be even more the case now, as there are a lot of uncertainties that could swing prices sharply up, or down.
Euro-zone fracas muddying the water Disarray in the euro-zone is very much on investors’ minds, zapping risk appetite. At the front of the pack in terms of euro-zone concerns is Greece and its dysfunctional government. Failure by Greece to form a coalition government following its recent elections means the country will hold another round of elections in June.
Leftists, who oppose austerity measures needed to secure emergency funding that would keep the country from defaulting on sovereign debt, are the frontrunners to take control. If that happens, euro-zone leaders will likely have to make some tough choices — step up to save Greece again or let them default and leave the bloc.
Aside from Greece, Europe is littered with other financial problems. Composite first quarter euro-zone GDP came in better than expected at 0%. Stronger-than expected growth in Germany (+0.5% GDP) offset negative growth in Italy (-0.8% GDP) and Spain (-0.3% GDP).French economic growth was flat (0% GDP). But while German economic growth was a positive surprise, business sentiment plunged in May. And German Finance Minister Wolfgang Schaeuble feels the euro-zone could face a couple more years of economic turmoil.
Economic concerns don’t end in Europe China’s economy is slowing more rapidly than expected as its top customer, the European Union, isn’t buying enough “stuff.” With a strong pickup in exports to Europe unlikely anytime soon given the financial woes there, the onus is on the Chinese government to promote economic growth while trying to keep inflation, primarily food prices, under control. That’s a tough task for a country that has more than 1.3 billion people to feed and keep employed.
And while the U.S. economy continues to grow, we are not out of the woods yet. Minutes from the April 24-25 Federal Open Market Committee meeting released last week showed there are ongoing concerns with high unemployment, U.S. fiscal policy inaction and global constraints, primarily in Europe. But the Fed also kept open hopes of QE3, with now several members indicating additional economic stimulus would be needed if the economic recovery stalls. That’s enough to avoid complete risk aversion for now.
Outlook: The rest of Europe has too much at risk to let Greece default or leave the euro-zone. With European problems lingering, the current environment gives investors little incentive to be long “risky” investments such as commodities or stocks. But unless problems spread to the U.S. or China, a 2008-like crash is not likely.
Grains — fundamentals vs. macro-economics
A classic tug-of-war is underway in the grain and soy markets as traders are weighing bullish fundamentals against bearish macro-economics. On the fundamental side, demand is the primary price driver — led by China. The country’s strong demand for corn and soybeans is obvious as they continue to actively buy U.S. supplies, especially on price breaks. That’s unlikely to change, although there is risk China could eventually sit back and wait to see how far prices will fall before booking additional needs.
That’s where macro-economics come into play. If China senses macro-economic headwinds are continuing
to build, their incentive to buy “now” becomes less if they feel prices will be cheaper “later.” So far, that hasn’t been the case, suggesting either China’s need for corn and soybeans is greater than believed (likely) or they sense prices could explode higher (probable). The scenario where fundamentals would make a strong pull would be if there’s a weather scare this summer. Given tight old-crop supplies, the margin for error is thin. A serious weather threat to U.S. crops could send markets into a frenzy.
Outlook: Macro-economics remain a threat to grain and soy futures, especially if there is further disarray in Europe that weakens investor risk appetite. But price action last week signals traders are turning their attention back to fundamentals. There will be a weather scare at some point this growing season, as the weather premium has largely been removed from the market, especially in new-crop corn. The primary advantage corn and soybeans have over other commodities, such as crude oil and gold, which are highly investment-driven and more of a function of economic well being, is that they could buck the general trend and surge higher in the face of macroeconomic concerns if there’s a weather scare.
Livestock — price recovery is finally underway As the calendar flipped to 2012, two of the surest “bets” were cattle futures would smash the all-time high and lean hog futures would rally seasonally into mid-summer. In the case of cattle, new highs were posted in early March and the market proceeded to plunge amid demand woes tied to the global economy, the lean finely textured beef fiasco and the BSE scare. The market is now trying to right itself. For hogs, demand concerns also came into play and tripped up a seasonal recovery. With the pork product market showing signs of life, a mini-seasonal price rally is likely and there’s hope of a strong recovery.
Outlook: Barring a global meltdown or another unforeseen demand scare, cattle and hog futures have posted lows. But the road to recovery will be slower than the price plunges.
