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The era of 'permanent volatility'

12/17/2010 @ 11:41am

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.

 

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.

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