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Commodity Insight: Optimistic despite market mess

It was bad and bearish enough to deal with the coronavirus impacting most all markets, but then the other shoe, so to speak, was dropped — that shoe being a price war erupting suddenly between Russia and Saudi Arabia.

Over the weekend, OPEC negotiations fell through to cut crude oil production in an effort to support prices as suggested by the Saudis. The Russians refused to go along with a production cut, and the Saudis quickly decided to escalate the conflict by boosting production to a record 12.3 million barrels a day. Within minutes, Russia retaliated, saying they would increase output by 500,000 barrels per day.

As a result, crude oil prices shed 25% in value in one day, the largest drop since 1991 with futures trading under $28 a barrel. Historically, crude oil is a leading indicator for commodities, per se, and the stock market.

The dramatic drop with crude oil values amid more cases of coronavirus in the United States and across the globe caused stocks and commodities to collapse. The Dow experienced an 8% decline, falling 2014 points, the largest point decline in history.

However, the Dow fell deeper yet with a new record one-day point decline only three days later. And all due to the price war between Russia and Saudi Arabia and fears of coronavirus.

Every time I see markets collapsing with investors, traders and agriculture producers wringing their collective hands, I am reminded of one of President Ronald Reagan’s favorite jokes.

From “How Ronald Reagan Changed My Life” by Peter Robinson, here it is and I hope you enjoy it as much as I have over the years: The joke concerns twin boys of 5 or 6. Worried that the boys had developed extreme personalities — one was a total pessimist, the other a total optimist — their parents took them to a psychiatrist.

First, the psychiatrist treated the pessimist. Trying to brighten his outlook, the psychiatrist took him to a room piled to the ceiling with brand-new toys. But instead of yelping with delight, the little boy burst into tears.

“What’s the matter?” the psychiatrist asked, baffled. “Don’t you want to play with any of the toys?”

“Yes,” the little boy bawled, “but if I did, I’d only break them.”

Next the psychiatrist treated the optimist. Trying to dampen his outlook, the psychiatrist took him to a room piled to the ceiling with horse manure.

But instead of wrinkling his nose in disgust, the optimist emitted just the yelp of delight the psychiatrist had been hoping to hear from his brother, the pessimist. Then he clambered to the top of the pile, dropped to his knees and began gleefully digging out scoop after scoop with his bare hands.

“What do you think you’re doing?” the psychiatrist asked, just as baffled by the optimist as he had been by the pessimist.

“With all this manure,” the little boy replied, beaming, “there must be a pony in here somewhere!”

The largest percentage collapse in history for the stock market took place on Oct. 16, 1987, known as, Black Monday. The Dow dropped 22.6% that day.

But here is how the U.S. soybean market did that fateful day 33 years ago, in 1987. Initially, as the Dow collapsed on Black Monday, along with gold prices and a host of other markets, soybeans dropped limit down at 30 cents.

By the close, however, the market was off 15 cents to settle at $5.24 a bushel. And nine months later, due to hot and dry conditions surfacing in the Grain Belt, in the spring and summer of 1988, soybean prices peaked out at $10.99.

Soybean prices more than doubled in value from lows posted on Black Monday. If you doubt me, do as Baseball Hall of Famer Casey Stengel was fond of saying: “You can look it up!”

In early January, I stated boldly there were three dominant forces lined up to impact the Big Four, stocks, bonds, currencies and commodities. Those three forces were coronavirus, the trade deal with China and climate change issues.

The marketplace is still dealing with the coronavirus mess, but I fully expect China to honor their pledge to buy copious amounts of U.S. foodstuffs. And as we approach the growing season, I expect climate change issues to begin surfacing, as well.

In today’s market environment, it is difficult to be bullish towards any market. After all, January was the most bearish January in history for stocks and commodities. February was worse yet.

And in early March, the bearish madness saw a new and negative market force surface, a price war between Russia and Saudi Arabia over crude oil. By any measure, 2020 is one of the most bearish years witnessed in a long time.

Nonetheless, I argue that somewhere under this week’s pile of horse manure is a pony. There was on Black Monday, 1987, and there is likely one now.

And yes, to fess up, I am kindred spirit to that overly optimistic boy looking for a pony under that huge pile. Believe me, there is at least one pony down there right now.

Or, just maybe, a herd of ponies.

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