TYPICAL OF the business life of a farmer, just as futures for 2018 slump, coffee and whiskey are in short supply.
Bad weather in Brazil and Vietnam (the two major coffee producers) has caused estimates of coffee stocks to fall by up to a third — so prices are skyrocketing.
But, for most other agricultural commodities, the hedge funds have thrown their money into the biggest bear market since 2006.
That means the traders of Chicago, New York, London, Paris and increasingly Shanghai are betting that ag prices are going to fall further in 2018 from their (wool and to an extent beef and lamb) current low or moderate prices.
Partly this is due to weather patterns, suggesting farmers will produce as much if not more grain, cotton and sugar than the growing world population will consume.
That’s the fundamentals. But they only count for so much for the money men.
The bigger issues is that they bet the Central Bankers have weak backbones and continue to create money, keeping the world (mainly the money markets) awash with cash.
Sure, there may be some tightening with some minor interest rises in USA and Europe, but they will largely be imposed on small business (such as farmers) and homeowners, leaving market traders with plenty of cash to splash.
And why should they splash that on boring ags, where farmers keep disappointing by always coming up with enough crop to feed people and thus keeping volatility needed for really profitable trading relatively minimal?
For 2018, stock markets look like climbing to new heights, which means lots of volatility (that’s sharp rises and drops in prices which traders can so easily borrow to bet for and against). Ordinary investors (including farmers who generally have not only their home but also their business) want a steady rise in prices and dividends so they can take a living wage and pay expenses and, hopefully, reduce some debt.
Traders want volatility. With a still rising stock market and twists and turns in the oil and metals markets, plus continuing low interest rates, plus President Trump’s tax cut (mainly for the rich, including the special tax concessions for traders), money has left ag commodity trading in record amounts in December.
That is concerning for farmers dependent on global value commodity prices, such as non-subsidised Australian and New Zealand farmers.
But remember that markets always forget one factor — the black swan, as investors call it. Something unpredictable.
And the higher stock and money markets go above the long-term trend line, the more vulnerable they are to a Black Swan moment. Remember 1893, 1929, 1961, 1973, 1981, 1987, 1998, 2007?
Our hint is the 2018 Black Swan rises in the East. Some incident in financial and debt markets in China sets-off reactions across USA, Japan and Europe.
Or China pulls the rug from under smug, debt-laden traders in the West, causes some market panic and uses that as cover to clean-out some of its home markets.
China’s authorities have had a couple of dry runs at doing this in ag and metals markets in 2016 and 2017 (check iron ore, copper, wool and sugar). It’s almost as if they have used these markets as experiments in pushing-up and then suddenly cutting demand for commodities (it worked in creating downward price pressure for a while and wiped out a few global traders).
The signs are worrying for 2018 — unless you have lots of coffee beans in stock or are an extremely brave trader. And the whiskey? The major corporate producers in Scotland and USA cut-back production in the last few years to force price rises and squeeze minor producers.