Prepared by Richard A. Brock & Associates, Inc.

How does that old saying go? Something like, “When the U.S. economy sneezes, the rest of the world catches a cold.” Well, Southeast Asia has come down with a severe case of economic pneumonia and it has given Wall Street the chills.

The question farmers and others associated with agribusiness should be asking is how will this economic dilemma halfway around the world impact grain and livestock prices? What we're finding out is just how globally- dependent U.S. agricultural markets have become. If the Asian economic crisis worsens and spreads, it has the potential to derail the emerging demand-driven rally in the grains.

It was a turbulent week in global financial markets to say the least. The Dow Jones Industrial Average recorded its largest one-day point loss on Monday, only to turn around and score its largest one-day gain the next day. Trading volume on Tuesday was an astounding 1.2 billion shares.

Bond futures moved sharply higher in what was seen as a “flight to quality” away from the world's troubled stock markets. But even after the U.S. stock market stabilized, bond futures remained strong. Strength in bonds might be the market's way of saying that a deflationary period for the U.S. economy can't be totally ruled out. Of course, that would mean interest rates will remain low.

The near collapse of the Hong Kong stock market is the event that sent Wall Street into a tizzy. But that crash was really just a symptom of much larger economic problems in that part of the world. Using a virtually unlimited line of credit, the “Asian tiger” economies grew too rapidly over the past few years. Earlier this year they found themselves with excess capacity and unable to sell all the goods being produced. Gone was their pricing power.

The next step was massive devaluation of the various currencies used in Southeast Asia. These devaluations were sudden and very severe for several emerging Asian nations. And, these currencies have gotten even weaker versus the dollar over the past couple weeks.

But it took the crash in Hong Kong to get Wall Street's attention. Up until then, the U.S. financial markets had pretty much shrugged off economic turmoil throughout the rest of Southeast Asia. But problems in Hong Kong hit too close to home for two reasons: It's the only currency in that part of the world that's still pegged to the U.S. Dollar. And, Hong Kong is seen as China's grand experiment in capitalism. A total meltdown in Hong Kong could slow, or even halt, economic reform in China, leaving the U.S. and the rest of the world on the outside looking in at that huge market.

The other threat is that Japan's economy will get pulled down even further than it already is by the fiscal mess many of its neighbors are in. Because Japan is by far the largest trading partner for the United States and the biggest buyer of U.S. farm commodities, the stakes are high.

So far, Japan has been able to ride out this latest storm reasonably well, despite its close proximity geographically and strong financial ties with Southeast Asia. It needs to be remembered, that Japan has been going through much the same type of turmoil since late 1989. That's when the Nikkei Stock Index peaked. Serious devaluation of the yen started in 1995.

The Japanese economy is not yet out of the woods. Since 1992, the long-term trend for Japan's stock market has been choppy and sideways. And, the trend for the past few months has clearly been down.

Some global economist are laying a good share of the blame for the current instability in Asia on the Japanese. When Japan's financial and real estate market turned soft a few years ago, that country found itself with excess capital. To escape high labor costs and a relatively strong yen at the time, Japanese investors turned to Southeast Asia and pumped money into the economies that are now in trouble. When things got a little dicey earlier this year, many analysts feel the Japanese moved too quickly to withdraw financial support from these top-heavy economies.

So why should farmers care if a nation like Indonesia is in economic disarray? By themselves, none of the nations currently experiencing a financial crash have a great impact on export demand for U.S. agricultural products. But together, it's a big deal. Sales to Asia account for almost half of all farm exports. No other part of the world even comes close in terms of importance to U.S. agriculture.

And, a vast majority of this business is done with Pacific Rim nations. Japan is the largest buyer of U.S. agricultural products, and South Korea, China, Taiwan and Hong Kong all set new records for farm imports from the United States last year. Growth in sales to China was particularly impressive, jumping 175% or $2.4 billion in 1996.

Corn is the commodity most dependent upon the Asian market. About 57% of all the coarse grains exported from the United States last year went to Asian nations with Pacific ports. Those same countries bought 45% of the soybean and 32% of the wheat the U.S. exported last year.

Clearly, this is business the grain markets can not afford to lose. So far, the most severe economic damage has been limited to nations that buy relatively small amounts of U.S. grains and meats. But because most of the countries in this part of the world actively trade with each other, there is a risk the economic crisis and deflation will spread. If that happens, it will likely to have a negative impact on exports. The grain markets will be nervously monitoring the pace of export sales the next few months.

The Bottom Line: While we remain basically friendly towards grain prices due to relatively tight stocks, this is not the time to be blindly bullish. The financial crisis in Asia throws another unknown into the mix. It's possible all the positive demand news has already been factored into the market, and most of the surprises from now on will be negative. We'll all need to stay on our toes. This promises to be a very interesting marketing year.

October 31, 1997 Richard A. Brock & Associates, Inc.

2050 W. Good Hope Road, Milwaukee, Wisconsin

Consensus National Futures and Financial On Line Index

Added to the WWW 11-07-97
Last updated on 11-07-97

Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com

wmeubank@ocp.kcmo.com