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Paragon Commentary

Futures File: Drone Strike & Big Harvests

Jan 03, 2020

Drone Strike Rocks Markets

Late Thursday night, a U.S. drone attacked a convoy near the Baghdad Airport, killing one of Iran’s top military leaders, General Qasem Soleimani. He led Iran’s elite Revolutionary Guards, and his power has been likened to a member of the U.S. Joint Chiefs of Staff or the director of the CIA.

The attack was presaged by U.S. Secretary of Defense Mark Esper who warned Thursday that the U.S. was preparing to conduct preemptive strikes against Iranian-backed forces in Iraq that threatened U.S. troops and allies. U.S. Secretary of State Mike Pompeo stated that the attack was driven by intelligence that Soleimani was preparing for an attack in the Middle East.

In response to the assassination of its top military leader, Iran vowed “severe revenge,” which sent diplomats and markets scrambling. The U.S. State Department told Americans to leave Iraq immediately. Meanwhile an additional 3,000 U.S. troops arrived in Kuwait, likely a pre-planned show of force.

U.S. stock markets tumbled on the news, as fear of war frequently interrupts financial markets. Meanwhile “safe-haven” assets like gold and U.S. Treasury bonds rose. Oil prices outpaced all other markets, climbing nearly 5% overnight, as traders grew anxious about the threat of a war in the Middle East.

War could directly impact oil fields in Iran and Iraq, as well as U.S. allies like Saudi Arabia and Kuwait. More critically, Iran could cut off the Strait of Hormuz, which lies just south of Iran. This narrow shipping lane is the only way for boats to depart the Persian Gulf, and nearly 20% of the world’s oil passes through that point. If war breaks out and that path is cut off, global oil prices could skyrocket.

As of midday Friday, February oil futures traded for $62.70 per barrel, near the highest price in eight months.

 

2020 – Bigger Harvests?

Since global grain prices rebounded during 2019, market watchers are expecting farmers to plant more aggressively in 2020. Many are estimating record-breaking global corn and soybean crops, while wheat production could drop only slightly due to weather problems around the world.

For U.S. farmers, increased global production could mean more competition, even if the U.S. – China trade deal is signed later this month as expected.

In the coming months, American farmers will have tough decisions about how many acres to plant and which crops to put in the ground, as shifting weather, prices, and trade policies complicate their plans.

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