On June 25, 2012, the futures contracts for key grain crops soared on the Chicago Board of Trade, following the latest pessimistic weather forecasts for upcoming harvests in the United States and in Russia––plus 7.7 percent for wheat, a peak in nearly 10 months, plus 7.2 percent for corn, or plus 3.6 percent for soybean, close to the 2008 historical top levels.
For several weeks now, investors have been closely monitoring weather forecasts for their positions on agricultural markets. However, this is not the only factor to chiefly influence their behavior today.
As published by the headline of a June 24 article from Reuters, investors have indeed “one eye on the sky and one on the economy,” and are thus in a tug of war between two contrary forces.
On one hand, the poor crop outlook in the two major grain-producing countries is acting as a bullish factor in agricultural markets. On the other hand, growing uncertainties in international markets are leading financial players to protect their investments, and dump riskier assets, among which some agricultural commodities. Consequently, the wheat, corn and soybean futures tumbled on June 21, with wheat plunging four percent after the ratings agency Moody’s downgraded 15 of the world’s major banks.
For momagri, this new episode of high instability only substantiates the impact of market players’ psychology and shared information signals, as factors that are more destabilizing than the true confrontation of supply and demand for physical products.
In fact, let’s not forget that, following Russia’s announcement of a ban on wheat exports in the summer of 2010, markets got carried away, leading to increased agricultural price volatility without any simultaneous impact on physical fundamentals.