Wednesday, March 16, 2011

Potential Japanese Nuclear fallout sends market into free fall.

Nuclear melt down in Japan? Although another Chernobyl is unlikely (were wheat gained 19% over ten trading sessions in 1986), the implications will be catastrophic on an economy already on its knees and a world economy still emerging from the GFC.

The 9.0 magnitude earthquake and tsunami that struck Japan last Friday afternoon has left world markets reeling, with commodities, stocks and treasuries not immune to the liquidation. The Japanese PM describes the aftermath as the worst crisis since WW2, with the death toll projected in the tens of thousands. The developing situation has made the markets nervous, especially in regard to fears of radioactive release from damaged power reactors north of Tokyo.

This uncertainty about the global economy and health of the Japanese economy is currently bearing heavily on the market (with grain markets all limit down last night), with thoughts that Japanese demand for commodities will drop and investor’s appetitive for risk disappearing.

Although the full extent of damage is yet to be determined, impact on ports and road infrastructure will be crucial to grain imports. With reports filtering through that key grain ports, which are located along the west coast and further south of the epicenter have no major structural damage evident.

With Japan a big customer of agricultural products, the third largest buyer of Australian wheat (1.1mmt in 2009/10) and a large purchaser of North American corn, wheat and canola. What are the impacts? So far none, with a Japanese colleague saying that no grain cargoes bound for Japan have been diverted or canceled as yet.

The situation shouldn’t pose a serious long-term issue with grain supply; the government will be looking to quell any future negative impact and will insure the quick flow of imported food. What should be looked closely is the risk of nuclear meltdown, with a fourth explosion in four days on the Fukushima Dai-ichi plant. If the worse case scenario happens, the nuclear fallout (depending on wind) will be catastrophic in one of the world’s densely populated areas.

This knee jerk reaction of the grain markets seems a bit over the top, considering no export business is lost (still tendering for grain in fact) and no major grain discharge terminal have minimal damage. However massive speculative selling and subsequent volatility reigns supreme. But as we learned in Economics, “cool heads should prevail and it never pays to sell in a market that is in free fall”

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