Market Commentary for 3/7/14
Crimea is dominating the news this week with everyone wanting to know its global market impact. Russia’s main concern is securing their only warm water port. Since 1700 Crimea was a part of Russia. However, in the early 1950′s it was “given” to Ukraine as they became a part of the Eastern Block. With this agreement Russia secured a lease with Ukraine through 2042 for use of the port. However, when Ukraine’s Government (formerly pro Russia) fell two weeks ago, Russia in an effort to protect their interests sent troops. 60% of this area is Russian speaking, preferring Moscow influencing their region rather than Kiev.
Russia supplies 25% of Western Europe’s natural gas through a Ukraine pipeline. It is uncertain if Europe will agree with the US’s position to put sanctions on Russia, fearing reprisals on their energy but early indications show they are not. Also, Ukraine is on the brink of bankruptcy, leaving them few options. There are so many unanswered questions — Will the West bail them out? Will Russia offer a “sweeter” deal? Will civil war break out? Will Russia invade, claiming pipeline protection?
Clearly US/Russian relations are at a low. If Western Europe does not back the U.S.’s diplomacy plan, then the US will likely be forced to let Russia have their way. The next week will be tense. War is bad for the economy because of its inherent uncertainty. Uncertainty leads to panic. Panic motivates a feeling of safety. For the money mangers this means selling stocks and buying commodities (oil, gold, corn, wheat).
I usually resist reactive decisions to situations like this, preferring the wait and see approach. Fundamentally this rally is overblown. Grain shipments out of the Ukraine have had little problems so far. Also, the amount of grain left in the Ukraine is not substantial, in terms of global numbers. It’s mostly a Non-GMO grain origin (compared to US GMO grain). Europe needs this Ukraine grain because it isn’t easy to replace with US corn.
Basis has taken a hit throughout the Midwest, meaning that farmers are heavy sellers. May corn is worth more than Dec corn right now. With the amount of grain available for carryout this isn’t warranted. Fear of money managers selling equities for commodities may be driving this.
I’m torn. Part of me wants to sell during this rally, but I’m also happy with my current position. So, I plan to wait a couple of weeks to see how this plays out. Why miss opportunity for more upside when I have plenty sold.
Those behind in 2013 crop sales have received a big lucky break and should learn the phrase “Bol’shoe spasibo, Comrade Putin” (thank you VERY MUCH, Mr. Putin)
The response to Ukraine has been very limited. The bean market continues to be driven by U.S. bean shortages and eventual Chinese old crop cancellations.
As far as new crop, most farmers I meet are planting a lot more beans in 2014. Profitable levels are attainable, but greed and short-term memories are keeping farmers from pulling the trigger. In 2010 beans prices were in the low $10′s and in 2009 the $9′s. History is not on the farmers side when bean acreages increase by 2% (which we are forecasted to do) next year.
Many traders are looking for the Old Crop (July) / New crop (Nov) spread to widen to $3.66. Old crop and new crop have no relationship anymore.
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