farmgate: Why Aren't Supply and Demand Fundamentals Moving Corn And Soybean Markets Anymore?
You have carefully constructed your marketing plan for the new crop. Your cost of production is noted. Tabs are kept on the domestic crop production. Notes are made about demand, and pricing opportunities look good with strong demand for both corn and soybeans. Fundamentals are strong, but for some reason the market does not seem to be following the fundamentals. In fact, it is totally ignoring the fundamentals. So what do you do with your marketing plan, tear it up?
No, don’t tear it up your marketing plan and shift to production of organic goat manure. But just recognize that the commodity market is no longer driven by supply and demand fundamentals. Agriculture has changed a lot in the past two years, and commodity marketing is one of the many changes. Elevators sometimes won’t offer forward contracts. Charting the basis does not always help. And the volatility in futures contracts is more than the basic contract price was three years ago. With the realization that it is hard to rely upon the old marketing adages taught by Dad and Grandpa, we find ourselves in a new marketing world that is a long way from finding its boundaries.
Extension Marketing Specialists Melvin Brees at the University of Missouri and Darrel Good at the University of Illinois both alerted farmers Friday that corn and soybean prices are now a function of many more factors than which existed a few months ago. And those factors are creating a market of volatile uncertainty. Darrel Good says, “Over the past week, December corn futures traded in a range of $0.55. In the past seven trading sessions, November soybean futures traded in a range of about $1.20.”
If you check the supply and demand statistics on your marketing plan, can you find significant changes in demand or supply? Probably not, but it does not take a significant drop in demand any more to undercut the grain market by $1-3 per bushel. Farmers are used to watching the progress of the Brazilian soybean crop, but that will have minimal impact, compared to the new era factors that are driving the grain markets.
Melvin Brees says the markets are being driven by more than the weather, production and carryover supplies. He says the new biofuels market has linked corn and soybean prices to the price of crude oil, and the value of the dollar has impacted all commodities from the standpoint of their export demand. And he adds, “These factors have become even more complicated due to the Wall Street financial woes, which has impacted the commodity markets as well as the financial markets. The activity in the energy, currency and financial markets, along with technical trading (chart signals, price action, etc.), sometimes overshadows the fundamentals (supply and demand factors) in the grain markets. But, not always! Some days the fundamentals overshadow the outside market factors and this uncertainty leads to volatile price action. Limit or double-digit prices move up or down on one day are often followed by double-digit price changes in the opposite direction the next day. This volatility is frustrating and creates a difficult environment for making marketing decisions.”
Darrel Good suggests watching the forces at work and understanding what impact they will have on the market.
1) In general, a weakening of the U.S. dollar has been viewed as positive for export prospects and therefore for prices of corn and soybeans and a strengthening of the dollar has been viewed as negative for both.
2) Lower crude oil prices are generally viewed as having a negative impact on prices due to the relationship to the price of biofuels and the profitability of biofuels production. Higher crude oil prices, then, are viewed as positive for corn and soybean prices.
And Good says the developments in the financial markets may have demand implications for corn and soybeans, “If problems in those markets lead to weakening U.S. and world economies, the demand for both food and energy could also weaken with direct implications for corn and soybean prices.”
Summary:
Supply and demand fundamentals are no long the only factors that move corn and soybean prices. Changes in the value of the dollar, variable prices for crude oil, and even the financial markets as impacted by investment bank activities to avoid bankruptcy have pushed and pulled on grain prices.
Posted by Stu Ellis on September 23, 2008 12:21 AM to farmgate