It doesn’t seem to matter whether analysts are studying the market fundamentals, technical charts or the stars these days, they all agree on one thing.
Prices are strong and there is plenty of potential for them to get stronger.
But there was a caveat attached to the bullish outlook analysts dangled tantalizingly in front of the 35,000 or so farmers who attended Manitoba Ag Days, the province’s largest farm show, earlier this month.
“Yes, we are in a bull market, but we are also vulnerable to a downward correction,” said David Drozd, president of Ag-Chieve Corporation.
“As we move to a new higher trading range, you are seeing a lot of volatility similar to the 1970s and that is not going to disappear,” he said.
External forces such as growing demand by emerging economies, the influence of non-traditional investors, the struggling global economy and plain old politics are meddling in commodity markets like never before seen. And that has them bouncing up and down like a yo-yo – albeit on a shorter string.
“I don’t think you can talk grain marketing today without some understanding of what is happening in the broader economic context,” Jonathon Driedger, a grain market analyst with FarmLink told canola farmers.
The three Fs
Ward Weisensel, chief operating officer of the Canadian Wheat Board, summed the current market influences as a mix of fundamentals, funds and fear.
For starters, the market fundamentals support higher prices. The latest USDA stocks report released Jan. 12 confirmed what many suspected; there is less corn and soybeans around than was earlier predicted. Demand is expected to remain at least as high if not higher, depending how South American crops pan out.
Weisensel said the projected U.S. corn carry-out for the 2010- 11 crop is expected to fall to 21 million tonnes, which is the lowest carry-out since the 11 million tonnes left over in 1995-96. However, in 1995-96 consumption of U.S. corn was 160 million tonnes. In 2010-11 it is projected to be 292 million tonnes. So in reality, the carry-out is proportionately just as tight if not more so, he told farmers attending the board’s annual breakfast.
Even a large new crop is unlikely to dampen the fundamental support. “A big crop is not necessarily negative to prices if the world needs it, and the world needs it,” Drozd said.
Battle for the acres
That’s setting the stage for an acreage battle between corn and soybeans. Cotton is expected to wade in from the sidelines and wheat will be along for the ride.
Couple all that with uncertain production conditions in Australia, recently hit by historic levels of flooding, in Russia and Ukraine, where drought decimated last year’s production and in Canada, where farmland remains saturated, and the stage is set for production- related volatility.
Meanwhile, investment funds, which first turned to the commodities in a big way when fleeing the subprime mortgage crisis in 2008, continue to fiddle with those fundamental forces.
In the fall of 2010, the volume of wheat represented in the open interest in the Chicago wheat markets was almost two times the amount of wheat the U.S. produces. Twenty-five per cent of that open interest was held by investors that have no connection to the wheat business.
Managed funds “see these futures contracts as uncorrelated with other aspects of their portfolio and they see it as a good vehicle for them to make investments,” Weisensel said.
“But when you’ve got one-quarter of the open interest of wheat futures tied up in people who are not tied into the fundamentals of the marketplace, that in itself creates tremendous volatility,” he said.
That dynamic coincided with the Irish debt crisis, which spooked investors. And whenever fear enters the markets, investors flee to known quantities such as the U.S. dollar. Because wheat futures are traded in U.S. dollars, which briefly strengthened, the wheat market dropped limit down four days running.
“What happened there is largely unrelated to the fundamentals of the wheat market – nothing happened from a supply-and-demand perspective that suggested that type of significant correction in the marketplace,” Weisensel said.
U.S. regulators have indicated plans to limit the levels of fund participation in grain markets but analysts said it remains to be seen how much that will affect how the markets function.
Another issue resurfacing as a market influence is the politics surrounding food security. Rising prices have also provoked food riots in some countries. “Nothing makes a government more nervous than a bunch of hungry stomachs,” said Driedger. “A lot of these economies are sitting on piles and piles of cash; they will want to put that money to work.”
Driedger said Canada will struggle to produce enough canola to meet domestic and export sales. If production falls short of the projected 13.371 million tonnes, it is likely that export sales will be rationed before domestic crush. “These companies don’t spend millions of dollars to build a plant to let it sit idle,” he said.
Drozd said market corrections are to be expected in a climate like this one, even if the long-term trend continues to rise. “We’ve factored a lot of the bullish news into the market already and you’ve got to keep feeding a bull market,” he said.
Any number of factors unrelated to agriculture could derail the upward trends, such as funds deciding to liquidate their positions, or the Commodity Futures Trading Commission in the U.S. moves in with regulation, changes in the U.S. debt situation, continued devaluation of the U.S. dollar, and a surge of demand from China.
It all makes marketing a challenge for growers, especially since there is more production uncertainty than usual going into spring seeding.
Much of the Prairies entered winter with saturated soil conditions and flood forecasters are already predicting significant flooding in the Red River and Assiniboine River watersheds.
“This is why I think incremental selling is the way to attack this year,” Drozd said.
It’s more important than ever for farmers to evaluate what they need to achieve in their marketing plan. That means knowing their break-even price per bushel, having a firm grip on their cash flow needs and sticking to the crop rotation that works best on their farm.
“Every crop you grow is in demand this year, so grow what you grow well,” Drozd said.
And beyond all that, they need the nerve to take advantage of profitable marketing opportunities – and then move on. “I see farmers selling at $12 a bushel and then it goes up to $13 and they’re discouraged,” he said.
What’s most important is they sold at a profitable level into the rising market, rather than waiting until it peaked and was on the way down.
Weisensel agreed, saying farmers need to build allowances for the unprecedented volatility into their marketing plans.
“In these types of markets, it’s very important that you have a robust, consistent risk management strategy,” he said.