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What I'm Watching This Week In The Grain Markets
By: Barchart | March 12, 2023

Silicon Valley Bank was founded in 1983, was rated a top 20 commercial bank and until late last week, I can guarantee was a group most folks not involved in a startup or venture capital had ever heard of. SVB as it is known became the first bank failure since 2020 and the 2nd largest failure in the US on record late last week, completing a tumultuous 48 hours, where it went from billions in value to being placed under the control of the FDIC.

To many in agriculture what happens to a bank in California feels like it means very little, and depending on what officials do in this particular situation over the next couple of days, that could be true. But I worry this could be the catalyst responsible for many changes in agriculture and the markets in the weeks, months and years ahead.

First things first, a run through of what took place at a 1000 foot level. As mentioned, SVB was a large commercial bank, most known for working with venture capitalists and start-ups. The group boasted on its website that it worked with half of the venture capital projects in the US, with 44% of tech and health startups doing their banking business there.

This large exposure to the tech and startup space started to create some cracks in the façade of the bank throughout 2022, as the flow of venture capital funds into startups started to dry up. Increases in interest rates and changes in monetary policy had prompted many to start thinking about their investments in a different way, pushing many of the start ups banking with SVB to start tapping into their funds at the bank as opposed to simply depositing money.

In addition to an uptick in cash outflow, the bank had much of its holdings sitting in long-term bonds. This is something many banks do, but SVB not only had a larger than normal amount of funds locked into these types of trades, it did nothing to hedge interest rate risks through swaps that would help offset a pinch if rates were to increase. $21 billion dollars of SVBs assets were tied up in a bond portfolio yielding 1.9%, the jump in interest rates sent the value of these bonds sharply underwater and without the offsetting hedge the cut was deep.

As a result the bank made moves, announcing it had sold some of its holdings to increase liquidity and was planning on making additional sales. Word of the need for liquidity started to spread, prompting some major account holders and investors to pull funds and triggering a selloff in the bank's stock. The bank went from a viable organization with plenty of liquidity according to its CEO on Thursday morning to under FDIC control by Friday afternoon.

According to analysts the make up of SVBs holdings and glaring lack of risk management was largely responsible for the cash pinch the bank found itself in. The subsequent run on deposits triggered by some leaders in industry telling others to pull funds proved catastrophic.

The fall of SVB caught most of the headlines, but the fact it coincided with the folding of another small bank midweek sent fears reverberating through the markets that this may be just the tip of the iceberg.

While what is happening in banking may feel far removed from the farmgate, it truly isn’t, as many folks are going to find what worked for them when it comes to managing risk may begin to change quickly, as the risks we are now managing are very different from the ones we’ve grown accustomed to managing these last few years.

The value of money is changing, and in that I don’t mean the dollar index or what it is able to buy, but instead what having cash means. At 41 years old I can tell you my generation barely knows what it’s like to borrow with significant interest, or to have cash that actually grows by just sitting in an account.

In addition, the days of investors seeking ways to eek out a percent or two of gain on their investments are behind us, with many now expecting these investments to compete with other avenues offering 5% or more with limited risk. The dry up in easy cash has already been seen in the tech industry, with significant job cuts and sharp changes in budgets happening for much of the last 6 months or more.

This will begin to be seen in other industries as well, as sharp increases in borrowing costs will likely begin to slow expenditures and force many to look at the cost of doing business with greater gusto.

The same can be said about investments, which gives me pause when I think about the managed money participation we’ve grown accustomed to in the ag markets these last few years. Speculators have loved buying grain, oilseeds and other commodity contracts on the inflation narrative, helped out greatly of course by the perfect storm of other bullish factors in the market.

The participation of managed money enhances the direction of any move as seen when funds moved incredibly short in the corn market in 2020 and again when they moved to the opposite position just 2 years later.

Of course, the supply and demand situation in grains has not been solved, with several factors that could swing bullish still at play. This doesn’t stop me from worrying we could see these funds in a position where they work to generate cash by liquidating their holdings of grain positions. While the recent price action in corn could be an indication this has already taken place, historically speaking funds do not just move from long to a neutral position.

If the production outlook remains free of any further major losses, a major catalyst for recent grain market strength and reasoning for holding positions not actively generating return could be removed for the foreseeable future.

In addition, unfortunately this will likely slow development and growth of the startups in agriculture we have grown so accustomed to. It costs millions if not billions to try and compete with the big dogs in this industry, a loss in outside cash will likely result in a tunnel vision of sorts when it comes to innovation.

Of course, much of this is simply just a hypothesis. It is possible SVB was an anomaly. The FDIC is working to find an acquisition partner for the group to help guarantee funds for depositors and other banks are reportedly in much better condition. This could be nothing more than a speedbump.

However, with US regulators saying banks in February had unrealized losses on securities of over $620 billion due to the sharp increase in rates and assets locked into low yielding positions, SVB is probably not the only group feeling the pinch.

If nothing else, the SVB debacle has brought counter party risk to light in a way we’re not accustomed to. If nothing else, as Nick Horob tweeted this week, it is likely to start a conversation about asset-liability mismatches and what that means across the board.

There are other things I will be watching this week as well. Representatives from Russia and Ukraine will meet to discuss the continuation of the grain corridor. Ukraine is still pushing for a full year extension with the addition of Mykolaiv, while Russia is still saying their exports are being limited by sanctions that need to be removed. The most likely solution is the corridor gets extended as is, but there is risk of volatility this week if Russia decides to double down on their recent threats.

With 2 weeks until the March quarterly stocks and acreage report, we will start to hear more about what traders are anticipating out of those numbers. At this point corn seems to be the clear winner in the acreage battle, though the recent shift in prices could have something to say about that, weather in the Northern Hemisphere will start to come into focus.

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