Germ-a-phobic Grain Futures - The Seasonal, Economic & Political
Factors Influencing Grain Futures Prices
Some speculators rely on technical calculations that chart the rise and fall of commodities prices. Others follow the fundamentals—the real-world variables that affect pricing. It doesn’t hurt to know something about both. While technical analysis is similar for all investments, fundamentals are not. So what really makes grain futures prices go up and down?
(Disclaimer: Seasonal factors of supply and demand are typically built into futures prices.)
This won’t surprise anyone. Grain is a crop; weather affects crops. Of course, analysis is complicated by the increasingly global nature of the grain markets. A wet spring in the United States that threatens to delay planting…Rains in Brazil at harvest time…A heavy one-day downpour in Ohio…A drought in Argentina…All of these affected grain futures in 2009.
This is the term for the amount of land farmers have set aside for a particular crop this year. Corn acreage intentions fell 1% from 2008 to 2009, while soybean acreage intentions rose marginally. This is a factor in the supply side of the all-important supply and demand equation. It is important to note that the seasonal factors of supply and demand are typically built into futures prices.
How much is left over from previous seasons that could be put on the market this season? Analysts refer to “on-farm” stocks (held at mills, elevators, warehouses, terminals and processors) and off-farm stocks.
How much are farmers paying for fertilizers…pesticides…fuel to process and transport their product…barge rates and ocean freight prices? Transportation price volatility can leave heavy footprints on the international grain markets.
The Chinese government cancels agricultural taxes…Farmers in Argentina wage a seven-day strike to protest export taxes…Grain prices move to the beat of the political drum.
When the state of California considers statutory limits on the growth of ethanol consumption, concerned that the use of corn increases the ‘carbon footprint’ of ethanol beyond attractive levels, this can lower the long-range ‘demand’ side of the all-important equation. Conversely, rising oil costs can raise demand for grain-based ethanol and drive grain futures prices up.
Germs and Other Crises
Remember the swine flu? Before it occurred to officials to call the virus by names such as Influenza A or H1N1, consumer worries caused a drop in demand for pork that led to fears of a drop in demand for feed. Early global swine flu reports sent grain futures plummeting. Any crisis with a direct or indirect connection to grains and a high degree of uncertainty can drive the markets wild.
Once you’ve taken all those fundamentals into account, however, there is still at least one more mover and shaker whose effects aren’t easy to calculate—your fellow speculator. In volatile markets, speculators can move markets beyond the logical range of fundamentals, which is why most experienced traders keep an eye on the technical side as well.