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DAVID KRUSE

By Staff | Jan 2, 2015

Contagion or haven? What will grains become? Oil, and as of late, the meat complex, has become commodities that have priced themselves to the point that demand was used up and competition became fierce, increasing supply.

Oil can be stored while meat has a short shelf life. There is a lack of confidence in many global currencies as they either manipulate their currency to achieve some end such as devaluing their debt as the Japanese are doing, or because their business models as nations do not work, such as with Russia and Argentina, where currencies are collapsing whether they want them to or not.

I would premise that as the result of the loss of confidence in many currencies , grain will substitute as a store of wealth. Gold is supposed to be an alternative currency, but it is a poor commercial substitute for grain as currency. Brazilian farmland, for example, is valued in soybeans. The measure there is a sack (2.2 bushels). They price farms in payments in sacks per hectare. The buyer delivers a negotiated number of sacks per hectare to a designated elevator as payment.

The price of land in Brazil has not changed in the number of sacks per hectare. The change in land prices in Brazil reflects the value of the soybeans.

When they fall, so does the price of the farm. Farms are often sold over terms of three to seven years. The seller doesn’t really know the full monetary value of his sale until the final payment is made.

This system compensated for a lack of long-term commercial financing and served as a hedge against inflation and currency devaluation. The Brazilian real continues to weaken and soybeans priced in real were the equivalent of $12 bushel in Brazil.

Corn is profitable to Ukrainian farmers in their currency. Russian wheat farmers are king of the hill there as the ruble collapses, while wheat in dollars goes up. Moscow has been concerned about exporting too much wheat spurring more domestic price inflation.

Its last plan was to buy wheat to hold assuring the supply was adequate. The price it initially offered farmers though had nowhere near the currency exchange rate that the export market was trading.

Those farmers will not sell. In Brazil they trade sacks of soybeans for fertilizer and chemicals. The practice of barter will expand the world over.

Argentina has become a storehouse of soybeans as it becomes an inflation and currency hedge. Argentine farmers are not going to sell 10 million metric tons of soybeans as that is their “can buried in the back yard.”

I don’t think that this is going to turn grain and soy into bull markets, but it will likely produce better selling opportunities than would otherwise have resulted.

It will be the same everywhere that currencies get weak. Russian farmers will end up holding a chunk of the world wheat stocks in the bin as a real money substitute for rubles in a bank.

What this will do in the change occurring here is that we are seeing a new class of demand for grain and soy develop.

We will see demand expanding from food, feed and biofuel to include grain and soy serving as a currency asset class. This will take a portion of large world-ending stocks and make them unavailable to the global market to consumers.

I think it is a big deal. Russian farmers are going to hoard wheat just like Argentine farmers are hoarding soybeans.

This contagion of grain hoarding could spread. Speculators may well move vulnerable currency assets into grains and soy as a safe haven.

The ruble has lost 50 percent of its value this year, companies such as Apple, stopped online transactions in Russia because of currency volatility and most will regret ever investing in that country before this is all done.

Russians were reportedly buying cars and appliances just to get assets to hold other than rubles.

The runs on Russian banks have started as they bring piles of cash rubles to exchange for foreign currency before it runs out.

Putin screwed up. His clan vastly underestimated how vulnerable they were. It’s become a crisis for what is essentially a mafia leadership.

There is a cascading effect on its access to capital as its dwindling reserves are all they have with outside access to the global financial system cut off by sanctions.

Moscow is on the verge of insolvency. Its commercial system is seizing up and some foreign companies doing business there will be forced to suspend operations.

I have no idea why any Russian farmer would part with a peck of grain that he didn’t have to sell, as grain is now hard currency there.

Their biggest threat is that Moscow will try to steal it from them by paying them far fewer rubles than it is worth. A lot of grain and soy is essentially being taken off the global market as it has become a new asset class as a haven to store capital.

The U.S. dollar roared back. No one is questioning who represents the world reserve currency anymore. Unfortunately that has a negative impact on U.S. ag trade as exports are harder for our biggest and best foreign buyers to pay for in their money and imports pick up as the strong dollar buys more.

Current grain exports may be supported temporarily by the idea they need to buy now before dollar strength makes it more expensive for them later.

Also with more grain and soy getting locked up around the world as a way to store wealth, the global carryover is not all available to the consuming market.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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