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Corona Virus Chronicle (XIV) - No FT, No comment

'the point brought out in the FT is that negative pricing already exists and whilst Oil was a shock and surprise, as we can see with the current over-abundant supply of money, it is not the first “thing” to turn negative.'

The common link between money, oil, pigs and strawberries

The Financial Times is one of the longest serving and most august of daily publications. It is, mostly, dedicated to reporting on investment markets across the world, but with some coverage on major global events, be they political or of some major consequence. The “FT” is of course available in both print and online. It also has versions that are updated for specific time zones as well as a fully resourced web service providing in depth insight into market events as they happen.

The paper was founded in 1888 and shortly after this time, due to competition from four other financial journals circulating in London, was printed on the now famous salmon pink news sheet paper. Over time, the FT absorbed or overcame it’s competition to become the leading and only UK, financially focussed daily paper. It has grown; not only in size, where it is a true broadsheet, but also in stature. The FT has spawned a series of financial market indices, the most well know being the FTSE100, followed by the 350 (the FTSE100 plus the next largest 250 UK listed PLC’s) and a host of other pertinent benchmarks. The FT is THE most credible and most read of all daily investment focussed papers. Split into two sections, one covering political, economic and country news together with opinion and economic articles, the second providing coverage on stocks and markets. However, there are some sections which provide high profile comment covering individual companies and events, mostly through the august LEX Column, which is penned in an authoritative, but, anonymous format. The Securities Institute even provided a course on how best to read it; Front page, Lex, flick through the commentary, reading whatever is relevant to you and then on to the Companies section, take a scan through the alphabetical company list and then on to the market movements section at the back….

A lot of investment people will “take the FT” but, alas, never read it. It is a sad fact that, of the printed circulation, most copy is left, unread, on reception area coffee tables. In fact, if you were to take a look at most finance professionals travelling through an airport on the redeye (remember those days?), you would hardly see an FT being bought , let alone read… well, it is a big paper.

However, for me it is a must read, every work day and even on Saturday. And so most weekends; “I’ll just be a few minutes scanning the FT.” always turns into a coffee and biscuits followed by a mad scramble to catch up with the breakfast dishes that should have been cleared before 9….

However, despite the usual Saturday goings on, one or two articles always catch the eye and this week after the amazing oil market moves, one of their correspondents, Robin Harding, discussing negative pricing, hit the spot. Selling oil by paying someone to take it away is an alien concept. Or so it would seem, but Robin opines there are many things that you pay people to take away; such as hair and rubbish. He highlights that we pay to get rid of quite a lot of material, that probably has only recently been purchased; wasted food being one of these.

Despite this, people have an aversion to negative prices and when the oil market headlines with negative pricing it comes as a shock. People always pay more attention to losses and costs than profits. Looking at money, the fact of the matter is that in some currencies people pay negative interest rates for a bank to look after it.

Negative pricing is probably more prevalent than we realise

In one sense, paying to safely deposit money is no different to the cost of owning a safe, which has an initial outlay cost and an opportunity cost in terms of precious space in the home. But there is a sense of silent rage that you are paying a bank to take your money, which enables them to use it, by lending to others, to make money. However, the point brought out in the FT is that negative pricing already exists and whilst Oil was a shock and surprise, as we can see with the current over-abundant supply of money, it is not the first “thing” to turn negative.

Perhaps, it is not just the fact that “oil turned negative” that is the story? The strange market event is the classic demand slump within an over supply dynamic, causing a deep change in pricing. Pricing which was pushed even lower by increased demand for actually taking care of the stuff as oil storage costs have soared. Which is really the point made on money, safes and banks. More supply increases storage costs, or in investment markets, reduced returns (prices up, yields down), to the extent that deposit and bond yields turn negative.

Looking further afield, you can expect these laws of supply and demand to feature in many markets, although with somewhat different input circumstances, one of which is Pork. Pork is experiencing a double virus problem. African Swine fever has affected the market for many months, gradually pushing prices up. Now, with the Corona Virus affecting the people who work in the meat finishing industry, the supply of finished pork (bacon, ham etc) has risen even further, whilst the price of live pigs has been falling due to the problems associated with the packing industry. Of course as nature takes it’s course, piglets, quickly, become pigs and they have more piglets.... So the cost of storing pigs, awaiting their fate, becomes more expensive and the natural world problem of what to do with pigs is vexing, to say the least. They cannot simply be held in storage waiting for markets to turn.

The question is therefore, should we also expect to see the same thing happen in other commodity markets? A crash in the value of a raw material, with a price increase in the deliverable product to consumers?

Already we have seen the beginnings of labour shortages in other farming sectors. So it follows that the same situation may occur. Soft fruit; not being picked for example, causing product to be left in the field. Resulting in the shortage into the food supply chain causing prices to surge. Effectively growing a crop which cannot be picked results in a cost to the grower. Right now, this looks to be a problem that cannot be addressed and will, at least, be one reason for countries to hope that peak virus passes sooner rather than later.

In the meantime, Wimbledon or not, Strawberries will become quite expensive this year and perhaps we will soon see more FT articles on negative commodity pricing in other markets as well as cash, bonds, oil and pork.

No FT, No Comment..

With thanks to Robin Harding, Financial Times Correspondent.

Peter Smart

Head of Investments

SaSo Strategic Advisers

28th April 2020

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About the Author

Peter Smart, Head of Investments

01534 488778

Peter has been involved in investment markets since 1985, working within the private client areas of two global banks and for 22 years as the fixed income specialist for the UK Wealth manager, Brewin Dolphin.  More recently Peter formed part of the investment team at bridport in Jersey specialising in the provision of specialist, income focussed portfolio’s.

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