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Permanent Volatility

The last decade saw dramatic shifts in commodity price volatility. It’s highly likely 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. 

We could first start to see this kind of wild volatility emerge this spring and summer. All eyes will be on growing conditions in South America, where half of the world’s soybeans are grown. Then, the market is already talking about a possible rally into spring to buy corn acreage, as the market is anticipating corn acres will be 4 million less than last year. 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 impeding supply-and-demand fundamentals for the grains, outside market influences are also at work.
 
Adding to this volatility are 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 how quickly tight inventories can become with one weather hiccup and how important world commerce, weather, and other supply-and-demand factors can quickly change price outlook. 

When it comes to volatility, the commodity price pendulum will have intense swings. If you are on the right side of these volatile swings, you will feel like a champion! If you are on the wrong side – or no side – the financial pain could be severe. 
 
Increased volatility means increased opportunity. Those who are prepared will likely fare well. As prices increase and inputs 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. 

In addition to shifting your marketing from an outlook-based approach to a strategic approach, you will also likely need to upgrade the tools you are using. With increased market volatility, few 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 may very well become a necessity for nearly everyone. If you would like assistance learning about these strategies and learning how to apply them, Stewart-Peterson and I are here to offer you a helping hand. We encourage you to do so soon, because the market volatility may be just around the corner. 

 

If you have questions, you can reach Naomi Blohm at nblohm@stewart-peterson.com.

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.

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