Rural America is in shock at the recent collapse of corn, soybean and wheat prices.
For those of you who are subscribers to the Brock Report, this should have been of no surprise. The last couple of months have created some of the best marketing opportunities for farmers that I have ever witnessed in over 30 years in this business.
Unfortunately, the shock of the substantial price moves to the downside has resulted in many farmers just ignoring the market and hoping that this is just a bad dream. It is not!
These are markets where it is important to accept and understand the reality of the changing worldwide economy we are now operating in.
Besides good growing conditions in the Corn Belt, even with a drought in many areas in the South, crop conditions have improved immeasurably in the last six weeks. That is only part of the story, however.
The two big issues impacting commodity prices are:
Changing rules for position limits by index funds
First, on the deflationary side, those who want to believe that the increasing money supply is inflationary are ignoring one of the biggest issues — credit has dried up and as a result it is irrelevant how big the money supply is. Money supply means nothing if people can't borrow it.
This results in very low money velocity (how fast we're spending it) and thus major worldwide deflation. We are only at the early stages of this deflationary spiral.
For over two years I have been pointing out the extreme danger of the excessive large positions index funds (long only funds) have been allowed to trade. Index funds received exemptions from the CFTC that have made no sense.
For example, the normal position limits for speculators in corn is 110 million bushels. At the top of the market in the summer of 2008, our estimate is that the single largest index fund was long close to 1.4 billion bushels of corn.
As we have pointed out for the last three years, this is a double-edged sword. Excessive speculation such as this drives the market too high in bull markets and will drive the market too low in bear markets.
Now it is clear that the Obama administration wants to bring these positions under control and the rules are going to change. As a result, we are witnessing liquidation from index funds in preparation of rule changes.
Since they are “long only,” that means a lot of new selling coming into the market. To understand this market, it is extremely important to understand that this was a key factor in making market moves — and will be for the next few months.
Wealth is a relative issue. An old friend of mine once said that inflation is an awful thing — it makes people who aren't very smart think they are. In other words, when markets are going up on a relative basis, everyone's wealth is moving up together. No one gains.
But on the way down, only the sharp and prudent marketers who are aggressive sellers can take advantage of declining markets. While everyone's net worth may decline some, those who manage well in these type of markets have an opportunity to sharply increase their “relative wealth” versus everyone else.
There are a lot of opportunities out there. Recognize the real changes in the trend of the market and go with it. Don't make this year's decisions on what worked or did not work last year. This is a new world.