Japan's Earthquake and Tsunami Disasters and Their Impact on Commodity Markets

from Agrimoney.com:

Japan's disaster may have a significant impact on grain prices. But not in a way that is not immediately apparent.

Sure, it is likely that the disaster will, for a while, continue to add to the negative pressure already weighing on agricultural commodities.

The country is, after all, one of the world's biggest (and perhaps the biggest) food importers, relying on bought-in products for 60% by calories of what its citizens eat, according to the US Department of Agriculture.

So any sign of a fall-off in its demand following the devastating earthquake and tsunami would be felt in easing up tight crop supply pipelines.

And external markets may not offer much support, given that investors were already in the mood for dumping riskier assets, such as shares and metals as well as crops.

Yen factor

For now, the potentially stimulating impact on Japanese food imports of the disaster are unlikey to get a look in.

The idea that Japan the need to import more food – albeit maybe of, say, finished products such as pork rather than feed corn - if much the country's own agricultural capabilities have been put out of action.

And of it having the stronger currency to make buy-ins more affordable. Ironically, one of the expected impacts of the disaster is to strengthen the yen, as insurers repatriate funds to pay claims, and the country sells foreign currency reserves, largely in US Treasury bonds, to raise cash.

After the Kobe earthquake in 2005, the yen appreciated by some 20% against the dollar within three months.

Food vs fuel 

But a longer-term impact may become harder to ignore – in reviving the case for agricultural commodities as a source of energy as well as food.

Soaring food prices appeared, early in the year, to have the biofuels lobby on the ropes, with energy crops seen as taking farmland from its "true" purpose of feeding the world.

However, the nuclear reactor problems caused by Japan's earthquake have redrawn question marks over one key form of conventional energy creation at a time when the shortcomings of another, oil, were already being examined following the unrest in the Middle East and North Africa.

Fuel security is back on the agenda. And while other conventionals such as coal and natural gas will do their bit to fill the gap, as will alternative sources such as wind and tidal power, farmers will likely be asked to carry a bigger burden -  even at a price in world food security.

Commodity prices rise with US Dollar vulnerability

Along with soybeans and gold, corn and crude oil have also risen to multi-week highs this morning. The USD has shown more vulnerability to the down side (see the chart of the US Dollar index, which is wrongly dated 12-25). There is a significant, if not strong, inverse correlation between the US Dollar and many commodity prices, especially commodities that are connected to inflation (gold) or fuel (soybeans, corn, crude oil). Even wheat was up 16 cents before collapsing later in the session.

Commodity inflation continues to swell with strong prices throughout the sector. What will the Fed do?

The Fed's Behavior

Probably they will continue to throw money at it, based upon observation of past Fed behavior. One must keep in mind that the Fed governors are all career bankers (except Bernanke, who is an academic), so group-think is their mentality. They operate with group-think banker's blinders in crises, so they are likely to react as the have in times past. Perhaps they don't realize that this kind of thinking and reactions are the cause of the problem, not the solution. The more they do it (create more and more money, which they call "liquidity"), the more they will reinforce the inflationary bias of the markets, and the more they will inject turmoil into the financial sector of the economy. They are amplifying a latent sense of panic that is building, and the more they interfere, the more they multiply this latent panic. They are almost guaranteeing a recession by interfering and creating such turmoil. They apparently don't realize that with so much Feddling (Fed + meddling = Feddling) they are creating a sense of panic in the markets. Ultimately, panic leads to greater turmoil and will eventually cause investors to remove money from the markets. I don't think this has happened en mass yet.

Unfortunately, the current election cycle is going to create even more pressure on the Fed to "do something!", so they probably will. Congress may act as well, which will also create more turmoil still. Turmoil in the financial markets appears to be the operative word to remember for the foreseeable future.

The soybeans bulls have done it again!

Another new record!

Soybeans have just risen to another new high twice today! We soybean bulls have done it again! This was a $500/contract trade, and I didn't even pick the top or bottom! I got out to early. Price rose to a second new high again after I made this chart.

Long live the soybean! I just love those little things! By the way, they taste good, too! I buy them at Costco all the time.

Seriously, though, one of the reasons that I love trading grains so much is that there is very little Fed or other government intervention in this market.

Government intervention increases market turmoil rather than calms it!

Consider how much turmoil has been created by the Fed, the Treasury, Bernanke, Greenspan, and Hank Paulson in the stock markets in the past few months. They haven't calmed the markets at all. To the contrary, they have added to the turmoil! Financial markets operate best, I believe, with minimal government intervention. Let the free markets work. The markets with the greatest government intervention tend to also be most volatile and tumultuous. How many times in the past few months have Fed actions, taken before the markets opened, caused traders in the stock markets to lose money? (This is one of the good reasons for trading futures rather than stocks -- they trade almost 24 hours!) Government intervention in the financial markets increases market turmoil rather than calms it!

Another reason if prefer to trade soybeans is that (as I have mentioned in past blog posts) soybeans have a larger lock limit than corn or wheat, so they can fluctuate more, with the potential of greater profits. Why trade anything else?

Soybean mini-primer

While soybeans are not really a grain (they are in the legume family, as are the many different beans and peas), they are classed among the grains for we futures traders. In appearance, the look much like peas in a pod. However, the pods are somewhat hairy in appearance.

Note also that when shelled, they also look much like dried peas, but without the wrinkles.

Soybeans are incredibly versatile and nutritious, too. Here in America, few people are aware how much they use soybeans without even realizing it. Additionally, they are the 2nd largest agricultural crop for the United States (corn is 1st). One of the reasons for the bull market in soybeans it that like corn, it is considered a potential source for fuel. Most people have heard of ethanol, which is derived primarily from corn. However, the soybean is also considered to be a good crop for deriving an alternative fuel source.