You are here
Why does THAT affect the price of grain?
We've all said it. We've all wondered it. "Seriously? Why
does what's happening in Europe's economy affect the price of corn in my
backyard?" Or perhaps you've heard an analyst on TV talk about the economy
in China, the value of the U.S. dollar, interest rates, or any number of
outside market factors that have swayed the price of a commodity higher or
If only things could be simplified. But in a global
marketplace, simplified just does not seem possible anymore.
Over the past few months in this column, we have been examining
possible scenarios regarding outside market influences that could drastically
affect the price of commodity futures; things other than general supply
and demand factors.
We have suggested that by looking at and understanding how
these outside market factors can shape and influence the price of grains or
livestock, you can ultimately assist your own awareness and develop long-term
plans, which ultimately leads to your successful commodity pricing. At
Stewart-Peterson, we call this "market scenario planning." It's our
way of preparing for whatever may influence the market.
We will wrap up the series today by remembering some
important lessons from the '80s, as well as reviewing the current global market
Remember the '80s
The '80s and farming; I remember high interest rates,
families struggling to get by, and farm policy. In the 1980s we had a farm
crisis. It began during the Carter administration and continued into the
Reagan years. Between 1981 and 1986 it has been estimated that one-quarter of
the assessed valuation of America's farms, based on land primarily, simply
The '80s crisis was preceded by a lucrative agricultural
export market and cheap money in the '70s, with farm family incomes above the
national family income average. Farmers and nonfarmer investors bid up the
price of land. (Sounding eerily familiar?)
In 1981 the large harvests, the closures of some export
markets, and a more valuable dollar compared to other currencies meant farm
product prices sank. Farmers couldn't make their land payments and began losing
their land. Farming community banks and other businesses failed.
Now, 30 years later, we have to face the reality that high interest
rates will come again. (In my opinion, sooner than we think.) Farms that just
took on debt to buy acreage or machinery will have quite the battle ahead if
those interest rates are not locked in as low, long-term interest rates.
Why is this scenario a real possibility? For one, the U.S.
Federal Reserve has been printing a lot of money lately to stimulate the
economy, and this will likely lead to inflation in the coming years. Don't get
caught with a big loan balance in an environment where interest rates go to 7%,
8%, or 9% (or higher) after inflation kicks in. Couple inflation with the
chance of lower commodity prices or any major changes in the Farm Bill, and
watch out; it could be the 1980s all over again. And that farm economy lasted a decade.
The updated global situation
Changes in political regimes, global economic policies,
terrorism, and global supply and demand for commodities are all forces outside
of our control that can impact markets. Any of these events can take front and
center stage at any time, allowing for a dramatic price move in any commodity. These
are often called "black swan" events; they can happen anytime,
Here are some of the global issues you need to watch and
- European Union: The concern is if the failing countries
within the Union continue to fail, will Germany, France, and the United Kingdom
be able to pull the lagging countries higher and keep them afloat? If Greece,
Spain, Italy, and Portugal continue to fail, it weighs on everyone else. If
people are unemployed, then they are not able to use any disposable income
(because they don't have any) to buy trinkets from the factories in China.
- China: Their economic growth is slowing, because Europe isn't
buying trinkets from their factories. The Wal-Marts of the world are ordering
less from the Chinese factories, therefore the Chinese workers' hours and wages
are being cut, which means their middle class is spending less. If the Chinese
middle class has to be mindful of spending, then they might not buy as much
food, which could affect the hog, corn, and soymeal prices in terms of
- Brazil and Argentina: These countries are our competition
in terms of production. They have supplies available to feed the world and can
fill the gaps between U.S. planting and harvest.
- Anything Middle East: Any flare-ups there will affect the
price of energy markets and can sway traders into thinking the sky is falling
or that they should bring back all the money that is currently in the stock
market and plunk it back into commodities. This could sway prices either
I'm not painting doom and gloom here. Actually, I'm
optimistic. I do believe there are things you can do to insulate yourself from
volatile prices caused by an unpredictable world.
First, watch your debt.
Second, be ready for anything. Don't get set in your ways
that prices will stay high forever. They could go higher yet, then slam lower,
or prices could slide lower and sit lower for several years.
Third, do some planning for multiple price possibilities (or
"Market Scenario Planning," as we call it). Develop Plans A, B, C, and
D, and then get ready to implement whichever scenario unfolds in this
marketplace. If grain prices start to go
lower, and stay low for years, think about the marketing tools you can use now
to protect yourself over the next few years – just in case the '80s come back to
Market Scenario Planning(sm) is a
service of Stewart-Peterson Inc. The data contained herein is believed to be drawn from
reliable sources but cannot be guaranteed. This material has been prepared by a
sales or trading employee or agent of Stewart-Peterson and is, or is in the
nature of, promoting the use of marketing tools, including futures and options.
Any decisions you may make to buy, sell or hold a futures or options position
on such research are entirely your own and not in any way deemed to be endorsed
by or attributed to Stewart-Peterson. 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. Copyright 2013 Stewart-Peterson Inc. All rights