The turmoil in the equities markets over the past couple of weeks serves as a reminder that we live in a global economic world. The apparent catalyst to the volatility has been indexed to something called the Yen carry trade. I use the word “apparent” because this trade has been going on strong – to the tune of Forex transactions equating to over $5 billion per day – since roughly 2018 and it is sometimes tough to distinguish between cause and effect in these massive markets.

For the sake of this discussion, it is not important whether the Yen carry trade the rocking in the market (the Nikkii index was down over 12% in one day and then came back 10% the next day, there is definitely something occurring in a raucous manner with currencies) is the reason for our markets to vacillate, it is important to understand what is happening and how it impacts us.

In simplistic terms, the Yen carry trade involves borrowing money in at currency that is characterized by a low interest rate environment and buying financial instruments of another currency that has a higher interest rate. Because of the size of the economies, one of the most popular trades has been the Japanese Yen against the U.S. dollar with the arbitrage yielding somewhere in the 5% range on a reasonably consistent basis. Not bad. That was until the Bank of Japan announced an interest rate increase during the same period where it appeared the U.S. economy is slowing and the chance for a rate cut for us is on the horizon. All of the money tried to move at once and – viola! – pandemonium ensues as everything is unraveling as the get me out orders flow.

In the two weeks that have followed this incident, things have stabilized and returned to something resembling normal. It is here that the pork market participant needs to pay attention. As the equity market was falling, the margin calls were mounting. This means that commodity funds in our markets were forced to reduce their exposure to free up the capital to make the financial obligation of their equity position.

These movements have nothing to do with the fundamentals of the hog or grain markets, it is all about money flow. We have a natural desire to combine cause with effect and most of the time we can do so with guarded certainty. Big exports to Mexico? We probably open up stronger for the morning. Bellies off in the afternoon cutout report? We are likely to see pressure the next day.

These money movements are a different beast and we have to be aware of their impact to better understand if our current or considered position is being influenced by “authentic” news or is just an aberration of the money game ... which could yield an unexpected opportunity depending on how we are positioned. My point of all of this is to draw awareness of another seemingly invisible force in our markets that is not fundamentally driven, it is all about the flow of money and how an interruption in the normal market influences may impact your position for a period of time. Funds are a nothing sandwich right now in hogs – they have room to add to the long position – while the recent record short position on corn has moderated a bit but is still heavy.

The USDA update last week had a couple of notable items. The biggest aha moment is the soy complex which indicated added acres and added yield. All of this led to a heavy balance sheet projection which has pressured prices since the report. To be sure, this was just an added catalyst to the downward trend in beans, we have lost roughly $2.50/bushel since the highs of late spring. It seems to me that beans have nowhere to move, are seemingly stuck in a sub-$10 environment with limited upside potential.

Corn also had an eye-opening yield number – a record by a good margin – that was mitigated by a reduction in acres. The balance sheet implications were less pronounced with December corn stuck either side of $4. Aside from the bump in volatility that was generated by the aforementioned shakes in the equity market, we are quiet on the input front for livestock production. That is not all bad.

Comments in this article are market commentary and are not to be construed as market advice. Trading is risky and not suitable for all individuals. Contact Kerns at [email protected].