It’s no surprise to those who religiously follow the markets (or, I suppose, even just pick up a WSJ once in a while) that one of this summer’s key story-lines has been the “jump in the world’s commodities prices.” Obviously, gold’s (the sexy and seemingly final destination in the investor’s “flight to safety”) grabbed most of the world’s media attention.
And while gold is the glittery, sexy story everyone’s paying attention to, in the distressed markets, corn is where it’s at.
Why, you may ask, is gold’s less-shiny, matte-yellow commodities cousin so fascinating and relevant?
It’s elementary, my dear financial Watson. For corn – that all-American, high-as-an-elephant’s-eye-commodity – is gearing up to drive many small American businesses out of, well, business.
First, before I opine on corn prices (a phrase I never thought I’d write), let’s take a macro-look at the commodities markets.
Bloomberg reports in “Hedge Funds Boost Bullish Agriculture Bets as Corn, Soy Yields May Slump” that domestic commodities production (particularly corn, soybeans, and cotton) levels have dropped so significantly, that “investors will keep piling money into corn and beans until they see better certainty what the crop size will be.” Things are so bad, in fact, that “the worst U.S. crop conditions since the dust bowl era of the 1930s are tightening domestic supplies.”
In short, across the commodities board, in a story as old as economic time, supply < demand. Ergo, and obviously, higher demand = higher prices.
One of the most interesting things about all this, however, at least from the distressed investing and consulting side of things, is that “the hottest summer since 1955 in Iowa and Illinois may mean lower yields for corn as signs of diminished output appeared last week during the four-day, seven-state Professional Farmers of America Midwest field tour.”
That’s right: corn – that all-American staple, the derivative of which exists as at least the partial backbone of the American economy – is getting more expensive. And as prices climb, small (<$100M) manufacturers, producers, and businesses already struggling across the Midwest (and the entire United States, of course) for economic survival are about to be dealt another financial body blow.
See, while many of us look at the markets broadly and commodities prices specifically as an intellectual (and, of course, on the trading/hedging side, profit-making) exercise, most small American businesses are ill-equipped to deal with both the variances in pricing and the hedging knowledge/experience necessary to manoeuvre around the historically devastating volatility that such products as corn currently provide. Consequently, when a commodity price unexpectedly, due to either supply or demand issues, pops skyward, most already-financially-stretched firms hit the financial wall. And, while many commentators muse about economic theories-vs-realities, we here “on the ground” are seeing a dramatic increase in commodities-driven emergencies in many small businesses (particularly across the Midwest).
Consequently, while the credit markets story will grab most of the headlines in the following months, I maintain that, heading into the final months of 2011, commodity price volatility will be at least partially responsible for the demise of many small American businesses.