ASIAN CRISIS
ITS IMPACT ON AGRICULTURE
Prepared by Richard A. Brock & Associates, Inc.
Over the last several weeks our recommendations have most likely shocked a few of you and many subscribers are probably just hoping that we are wrong on our negative forecast for corn, soybean and wheat prices. Nevertheless, thus far the forecast has been very much on target and the Asian crisis could add fuel to the fire.
Asian Market Is Important
Thus far, much of the negative news of the Asian crisis has been “swept under the rug” and downplayed by politicians in this country and even by other world leaders. But this is not a minor issue. The Asian melt-down will likely be recorded in history as one of the most significant economic events of this century. Consider the following:
1.) Japan accounts for 42% of all export commitments in corn, Taiwan accounts for 11% and South Korea for 7%–a combined total of 60% of our export commitments. The importance of the Asian countries relative to corn prices is extremely significant.
2.) The Netherlands is the largest buyer of soybeans from the United States accounting thus far for 14.8% of our commitments. But China and Japan are close behind, each accounting for over 10% or a combined 20% of our total soybean export commitments.
3.) The yen is at a five-year low versus the dollar and Japan has just experienced its biggest business failure in history with the collapse of Yamaichi Securities.
4.) Just recently the Korean stock market plunged and while that may seem relatively minor, South Korea has the world's 11th largest economy which will eventually send negative ripples throughout the world.
The Bottom Line: The Asian crisis will not just impact financial markets throughout the world, but more importantly will result in reduced demand from Asia that will clearly have an impact on GDP growth in the United States, Europe and South America. Only now are we starting to see the impact on agricultural demand in the areas of cotton, grains and to some extent livestock. The full impact of the Asian fall-out is just now starting to surface.
Beauty Is In The Eye Of The Beholder
And so it also goes for commodity prices. Prices are only good or bad based on a comparison. For obvious reasons most of us prefer to make all of our price comparisons in U.S. Dollars. Many years ago, price comparisons were made in British pounds. Who is to say that the most equitable comparison is to look at the price of anything in the terms of only U.S. Dollars?
More specifically, now that we are in a freely traded world where commodities flow to and from other countries with limited tariffs and taxes, currencies are also freely traded. Therefore, why not look at price comparisons in terms of our largest buyer–Japan. As you may expect, the comparisons are quite different than when looking at only U.S. Dollars.
To begin with, the Japanese Yen has dropped significantly in the last five years relative to the U.S. Dollar. Even so the yen is still over twice as strong as it was in 1984. Relative to history, therefore, one could conclude that with the weakness of the Asian economies the yen may still have a considerable way to go on the downside. That's not good for agriculture in that continued weakness of the yen only makes our commodity markets higher priced.
The chart on soybeans clearly shows the discrepancies in price moves when they are compared in yen versus U.S. Dollars. In the mid-1970's when commodity prices were very strong and soybeans in the United States were trading near the $10 mark, the yen was also extremely weak and consequently some of the highest prices in recorded history occurred at that time when soybeans in yen were trading at over 2,600 yen per bushel. In 1984, however, the Japanese Yen began its major bull market that lasted until 1995. As our commodity prices started to weaken at the same time the yen was strengthening, soybeans and corn became very cheap commodities for the Japanese. That trend has now reversed.
For example, in April of 1995 nearby soybeans were trading at $5.67 per bushel which was equivalent to 474 yen per bushel. By April of this year soybeans had risen to a high in the nearby futures of $8.89 is a 56% increase in price. By the middle of this week nearby futures had dropped to $7.06 per bushel, which was still a 24% increase in price over where the market was trading in April of 1995.
What does this mean in Japanese Yen? In April of 1995 soybeans were trading at 474 yen per bushel, but increased to 1,122 yen per bushel by April of this year, a 237% increase in price. Even today, as the yen has continued to decline, soybeans are priced at approximately 909 yen per bushel which is nearly double what they were in April of 1995.
Strategy
On November 7, when central Illinois soybeans were at 7.21, we recommended hedgers go to 100% sold and strict cash marketers to 60%. This past week we made our first new crop sale in November 1998 futures at 6.76 on 30%. Remember, soybeans have averaged above 7.00 only 4 times in history. These are still high prices.
December 5, 1997 Richard A. Brock & Associates, Inc.
2050 W. Good Hope Road, Milwaukee, Wisconsin
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