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9 biggest futures changes in 30 years
At a fall seminar, a young farmer asked, “What are the biggest changes that you've seen in the futures industry in the years that you've been trading?” This was a tough question to answer on the spot, and before I could answer, he came up with an even harder question, “How can you be optimistic about farm profits after the recent run-up in prices?” Indeed, land, rent, fertilizer, and other input expenses have really gone up, and historically it has usually been dangerous to get bullish after two or three years of high grain prices.
To answer his first question, I've listed the 9 biggest changes that I've seen in the 30-plus years that I have been trading grain futures and working with farmers. I have broken the changes into three categories: information, globalization, and commercialization.
1. The Internet has changed how we get information and trade grain. When I first started in grain trading, most farmers would drive into town to check on the grain markets. Now they can check bids on their smart phones and process trades from a laptop in their tractor. It all happens a lot faster.
The Internet has changed what we analyze in the markets. In the 1970s, we would study supply-demand tables and analyze the farm program.
2. Now the markets are more driven by technical trading. Grain traders and farmers analyze charts and make pricing decisions based on areas of support and resistance, and use a wide array of technical analysis tools.
3. China has become the largest soybean buyer in the world and is also becoming a major export market for corn. This is a huge change from 30 years ago, when the country was an export competitor.
4. Brazil and Argentina have ramped up production, and now those two countries produce more soybeans than the U.S. That creates two critical growing seasons that we need to watch each year in the grain markets.
5. Traders around the world now trade in the Chicago Board of Trade futures market. I have traded grain futures from my laptop in six countries and 10 different time zones in the last six years. It is a very strange feeling to trade the night markets during the day and the day markets during the night.
6. When I first went to the CBOT in 1974, it was owned by the members. The members set policy and the rules of trading. In 2005, the CBOT went public and is now owned by the shareholders, which has made a good and profound difference in the way the CBOT works.
7. In 1996, the CBOT started “Project A,”, which allowed us to trade at night on the CBOT. By 1998, it adopted the Eurex system of electronic trading. This greatly increased investor participation in the markets and increased trade volume from around the world.
8. In 2005, many Wall Street firms started to approach commodities as another investment alternative. They offered different commodity index funds and electronic trading funds (ETFs). This has brought a lot more volume and volatility into the grain markets. It also increased public participation in the grain markets.
9. In 2012, the markets expanded the trading hours to 21 hours per day. The markets are now open from 5 p.m. till 2 p.m. Central Time, Sunday night through Friday afternoon. These longer hours have been a challenge for grain companies, but they do keep the CBOT firmly in place as the leading grain futures market around the world 21 hours per day.
Now to answer the young farmer's second question, “How can you be optimistic about farm profits after the recent run-up in prices?”
When I study a company or industry, I have learned that it is revenue that usually drives profits and capital values. The revenue charts for corn and soybeans are what make me optimistic about farm profits in the future. It will not always be as good as it was the last two years, but it will continue to outperform most other industries.
The U.S. corn revenue chart from 2004 through 2012 on the previous page shows that it is not always a straight-up move. I would not be surprised to see a setback in 2013 or 2014. But the trend is for higher revenue and that will continue. For corn, the fundamentals have changed dramatically since the first few ethanol plants were built in the late 1980s. Ethanol is using about 40% of the U.S. and world feed grain as demand continues to grow. If global corn production surges in 2013, prices may drop lower into the fall of 2013, but total corn revenue will continue to trend higher.
The U.S. soybean revenue chart from 2004 to 2012 on the previous page shows the low in 2005 and the pullback into 2011. But the trend is for higher U.S. soybean revenue. For soybeans, the big change in fundamentals is from China. China has become a huge buyer of U.S. soybeans. As its economy improves and its citizens' diets improve, the outlook is very positive for soybean farmers around the world. After watching prices go over $17 this year, I would not be surprised to see prices set back next year if we have better weather in the U.S. Nonetheless, I still believe in higher total revenue.