The volitility is coming to grains

[macdon02]

Should know by 1030am today, this might take your breathe away.

[GOODRUM]

What’s up?

[Templeboy]

Mfg. data from China is bad, lowest recorded in decades. Most commodities sitting at near term support. Analysts I read are saying its overdone, I'll bet they said that in '29 as well.
Farming is not for the faint of Heart! Record land prices, rents that are unsustainable, and commodity uncertainty.
Is it time for the Big Short?

[GOODRUM]

No news feed yet.

[Austrian Economics]

Interest rates have been in a falling trend for 39 years now as a result of our embrace of irredeemable fiat currencies. As interest rates fall, so do commodity prices. The trends towards lower rates will not suddenly reverse itself even though most financial analysts think it will; with fiat there is no mechanism for putting an effective floor under rates. Eventually Canada will find itself in negative interest rate territory too.

As commodity prices fall, profit margins get squeezed. The only relief available is another round of substantial interest rate cuts to get the yield curve out of inversion. Recovery only comes once the rate of interest falls below the rate of return of the marginal business. We are talking years for this to come about, not months.

[FarmJunkie]

Macdon u spilling the beans?

[jazz]

Interest rates have been in a falling trend for 39 years now as a result of our embrace of irredeemable fiat currencies. As interest rates fall, so do commodity prices. The trends towards lower rates will not suddenly reverse itself even though most financial analysts think it will; with fiat there is no mechanism for putting an effective floor under rates. Eventually Canada will find itself in negative interest rate territory too.

As commodity prices fall, profit margins get squeezed. The only relief available is another round of substantial interest rate cuts to get the yield curve out of inversion. Recovery only comes once the rate of interest falls below the rate of return of the marginal business. We are talking years for this to come about, not months.

All of that sounds logical but according to Zeihan once there are more takers from the welfare state than contributors (when mass retirement happens and the demographics turn) the cost of capital is going to triple.

[Austrian Economics]

"All of that sounds logical but according to Zeihan once there are more takers from the welfare state than contributors (when mass retirement happens and the demographics turn) the cost of capital is going to triple."

You're right about the rising burden of the welfare state, but as long as we have central banks, they will always act to force down the rate of interest, even if it means forcing it down to unsustainable or even nonsensical levels. We will see negative rates within a decade here in Canada.

The inverse of falling interest rates are rising asset prices. We have been seeing that for years in real estate, equities, farmland and any other capital good that can provide an income. The rising asset value makes people feel as if they are rich, but once interest rates become disconnected from a proper price discovery mechanism, what we are actually doing is consuming capital; i.e. eating the seed corn.

Skyrocketing farmland values are fine if your intention is to retire and consume your capital. If you want to expand your farm for the next generation, the burden of doing so rises exponentially in a falling interest rate regime. The purpose of buying an asset is to generate a stream of income. At an interest rate of 10%, a dollar of income costs $10. At 5% interest, a dollar of income costs $20. At 1% interest, a dollar of income costs $100.

If an economy is consuming capital faster that it can be produced, what effect would this have on asset prices? Will they go up or go down?

[macdon02]

I was looking for the rate cut to fuel grains, volatility tends to migrate from market to market. I was wrong so far but regardless, the .5% is bearish USD and bullish grains. We have a rally.

[sumdumguy]

Gold up $45 this morn? Whatsup? Silver not so much.

[bucket]

I was looking for the rate cut to fuel grains, volatility tends to migrate from market to market. I was wrong so far but regardless, the .5% is bearish USD and bullish grains. We have a rally.

What's Errol going to do?

[Austrian Economics]

Re the question of why farmland prices are rising all out of proportion to farm income, the answer lies in the falling interest rate trend. There's an old saying that you don't buy a house, you buy a mortgage payment. It's the same for farmland. If the rate of interest gets cut in half, (and half again, and half again after that) the mechanism of arbitrage works to convert what would have been a saving in interest payments into a bid on the asset. The process is beginning to stall out at the present time as debt service is consuming too much margin. It will restart once interest rates are slashed again.

The long term fall in commodity prices is also the result of this same terminal decline in interest rates. If you are a seed breeder and your projected rate of return on a proposed business plan is 5% but interest rates are 6%, you won't borrow to finance any new ventures. But if the rate falls to 3%, your business plan is now viable. The result will be the introduction of new seed varieties with higher yields. Of course, the higher yields mean greater supply and thus lower prices. This process has been repeated over and over again for the current 39 year falling interest rate cycle. It's no accident that this cycle has seen a phenomenal increase in the number of companies creating improved farm inputs in every category from seed to equipment. The downside is that this puts downward pressure on commodity prices.

Lest anyone think that I believe that our present interest rate trend is sustainable, let me say that it is certainly not. A free market in credit without continual central bank intervention would never have seen interest rates rise to where they were in 1981, nor would you see them plunge all the way to zero. Capital does not self-replicate out of nothingness, so a zero interest rate is a blatantly false signal to investors.

[sumdumguy]

Where did Austrian Economics come from? You been lurking on here?

[Austrian Economics]

Years ago I posted quite often, but it's been so long I forgot my old username. I ran across some interesting topics recently that brought me back on board.

[jazz]

Years ago I posted quite often, but it's been so long I forgot my old username. I ran across some interesting topics recently that brought me back on board.

I will pitch a theory. The reason why more fed intervention is needed more often, more recessions, more volatility, more flash crashes.....is globalization itself.

We now have supply chains chased off our shores that now sit 10,000 miles away across an ocean and behind a communist curtain. The system has become much more fragile, more mismatched, more just in time, more currency based etc. Thus it needs more intervention, more steering and more stimulus to correct errors.

Some economic genius thought it would be a good idea to offshore 97% of our antibiotic production to china.