In all of the years that I have been talking to farmers about the commodity markets, one question gets asked more than any other. There are a lot of variations in the exact wording, but the theme of the comment is usually around how much the managed speculator money in the commodity markets affects the cash price of agricultural products, and how little their decision making seems to be connected to events in the field. My standard answer has always been how the volume and liquidity that the funds bring to the market are actually useful to the trade, and that on some occasions, the fund activity actually takes prices higher than the end users of grain would prefer that they go. Regardless of the consequences of having these funds in the commodity markets, an upcoming decision by the U.S. Federal Reserve may significantly limit a number of players in this segment of the marketplace.
The subject being debated in Washington is whether or not deposit-taking U.S. banks should be permitted to trade in physical commodities like oil, minerals, and agricultural products. At issue is how regulators can effectively assess the safety of citizens’ bank deposits in the incredibly complex and volatile world of commodity trading. Such a ruling to take deposit banks out of commodities would eliminate players like JP Morgan Chase, Morgan Stanley and Goldman Sachs from the commodity trading business. In fact, the 10 biggest banks on Wall Street earned about $6 billion in commodity trading revenue last year, proving that American banks are more than just sideline players in the commodity markets.
Goldman Sachs and Morgan Stanley were both historically permitted to trade in commodities because they were investment banks, but during the American financial meltdown of 2008, they became bank holding companies which had retail banking subsidiaries. At the time, the U.S. Federal Reserve gave them a five-year grace period to exit physical commodity trading, and that grace period expires in September 2013. With $7.7 billion in commodity holdings in their March 31 financial statement, it certainly does not appear that Goldman Sachs has been exiting the commodity business approaching the September deadline. To be clear, most of the invested capital is in energy and minerals, but agriculture still holds a portion of this portfolio.
So what does all of this mean if you are a cash grain producer in Eastern Canada? I’m not certain that it’s a good use of our time or effort to attempt to out guess a political game between the U.S. Federal Reserve and the largest banks in the United States. Ultimately, the Fed’s decision could go either way, but the prospect of pushing some of the biggest players out of an already nervous market is not constructive to buyer confidence.
The reality is that this will not break the market, but it is one more straw on the back of a camel which is already stumbling under the weight of its load. Twelve months ago, South America had just suffered a drought, and North America was in the midst of one of its own. Since then world grain supplies have recovered substantially, and the prospects for a better American crop this year look good. People are already having trouble finding reasons to purchase commodities, so even the suggestion that some of the liquidity could get forced out of the market makes them more reluctant to buy in.
Farmers with grain to market need to consider taking advantage of the recovery rallies that will come over the balance of the 2013 growing season to make additional forward sales purely as a defensive move against all of the negative pressures in the market.