The early planting and warm weather is optimal for developing crops. As always, the weather that follows will make or break the crop. Yet, the market has factored much of this news into the price. If one looks only at the fundamentals of supply and demand, the case can be made for even lower prices.
It is sobering to recognize that much the current support in commodities is coming from investors who are fearful of another economic downturn in Europe. People are looking for a safe haven for their investment capital. Many are investing in U.S. government bonds as a safer bet than stocks. With this flight to quality, commodities are receiving the benefit from some of this re-allocation of capital.
In my last column, I wrote about the basis being a "snapshot" of the local supply and demand. Understanding the nature of the local market can give one a significant "grain angle" when it comes to making marketing decisions. It is also important to look for that angle on the larger stage of the world market.
One can get a "snapshot" of the global market by studying the basis at the export terminals. Ports such as New Orleans and Portland are key markets in the exports from the United States into the global market.
New Orleans basis is reflective of barge freight on the central river system along with export demand. Portland basis is reflective of rail freights from the Midwest to the Pacific Northwest, barge freight on the Columbia River and export demand to the Pacific Rim countries.
If the local market is connected to the river system or a major rail line to the Pacific Northwest, your local basis can be affected by the basis in the export markets. These draws on the local grain supply must compete with local demand to originate bushels.
In other words, the local livestock feeder or ethanol plant has to compete with China or Europe to secure grain for their operations. The world market does directly impact the local grain market. The interconnectedness of these markets has been growing during the last 40 years. Economists call this "globalization," which is a verb that means; to become or make something become international.
Globalization of the world grain markets makes the knowledge of economic events in other countries imperative, if you are to be a student of your business.
The global economic events affect more markets than the grain trade. The supply and demand of capital can be a driver for where the capital is invested. This has a direct impact on the credit markets. When credit is in high demand, the market will rise to attract the capital. When credit is in low demand, the market will fall and interest rates become lower.
This theory of the credit markets works well in a "vacuum," or in a "perfect world." When global economic events impact individual governments, they have the ability to impact interest rates and capital flow by making policy decisions. With the subsidies and "bailouts" that occur during times of crisis, the global economy becomes even more complicated.
To simplify the complexity, one can simply study the local and export basis to get a feel for supply and demand. The value of the U.S. dollar gives us a "snapshot" of our global economic power. The value of U.S. government debt instruments gives us a sense of the credit markets. The value of the stock markets around the world gives us a sense of where investors want to put their money.
The greatest "grain angle" is the understanding that all of this information is factored into the price of grain that is discovered on the commodity exchanges. As a student of our business, we must remember that all that is known about the grain markets today is immediately factored into the price we currently have.
We know what the price is today, based on the information that the markets have factored into the price. We do not know what they will be tomorrow. If we know what our margins are, we can reward the market by capturing the price when it is offered.
Making our marketing decisions as a financial decision rather than a trading decision is a "grain angle" that can be a key to equity management.
...
Grain Angles is written by Tom Neher, AgStar Financial Services vice president of agribusiness and grain specialist from Rochester, Minn.
Money/Markets
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Grain Angles: Fundamental case for lower prices
Originally published in the May 28, 2010, print edition.
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