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The era of 'permanent volatility'
The last five years have seen dramatic shifts in commodity price volatility. It's highly likely that this shift in volatility is here to stay for the foreseeable future. Agricultural commodity markets were relatively stable in the past, due to factors such as government programs, weak demand, favorable weather and high carryover stocks. In the past market environment, producers could successfully use simple crop marketing strategies because the market fundamentals were more stable and prices were less volatile.
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Times have changed, and we will likely see further price volatility in the coming months.
Wild volatility will likely characterize the typical seasonal ups and downs we're accustomed to seeing. Rallies into spring to buy acreage are likely. Once the crop is planted, the marketplace will look toward weather and a potential bin busting crop, or another year of surprisingly average or below average yields, which sends the market into a buying frenzy. In addition to the impending supply and demand fundamentals for the grains, outside market influences are also at work, specifically, the Funds.
Investors look for opportunities. Those who are shrewd and see a changing world and marketplace understand the relevance that commodity markets play. Managers of large pools of money, also referred to as hedge managers or fund managers, found opportunities to leverage assets using futures and options markets. This new knowledge and these new players have helped to provide underlying support for markets.
Demand for investments is also heightened from both the food and fuel sectors. As a manager of money, you are looking for opportunity, and this means exploring your horizons. The increased money into commodities over the last decade is a proven indicator that the world is well aware of tight inventories and how important world commerce, weather, and other supply and demand factors can quickly change price outlook.
The odds are also high that demand will decline. That means, as the market perceives a few bushels too many in a corn crop, prices could plunge $2, and if the market perceives a supply shortage of just a few bushels, the market could rally $2 or $3.
When it comes to volatility, the commodity price pendulum will have intense swings. Business Week recently published a special report on the subject of commodity prices, describing a new world with "permanent volatility." If you are on the right side of these volatile swings, you will feel like a champion! Increased volatility means increased opportunity. Those who are prepared will likely fare well.
As prices increase and input costs follow, farmers are probably at greater risk than ever that one year of marketing mistakes could wipe them out. Therefore, the challenge to farmers is to be acute marketers; aware of all marketing tools and the knowledge and discipline to use them.
You will likely need to upgrade the tools you are using. With increased market volatility, fewer farm marketers will be in a position to use futures, and even fewer farmers will want to pay the options premiums required for market entry. Advanced option strategies to reduce costs and still achieve goals may very well become a necessity for nearly everyone who wants to do marketing well and thrive in this era of "permanent volatility." I encourage you to learn soon, because more market volatility may be just around the corner.
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures trading involves risk of loss and should be carefully considered before investing. Past performance may not be indicative of future results.
Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2010 Stewart-Peterson Inc. All rights reserved.