The big picture

03/21/2012 @ 11:24am

For the past 24 years, I've seen changes in trading agricultural markets that my father (a retired commodities trader) could not have imagined when he was explaining his industry to a fifth-grader in 1975.

What's changed? Everything and nothing. Trading is still trading. We all try and find market opportunities and take advantage of them. But the inputs that we use to help make those decisions have changed dramatically. It's become harder to be a specialist, and it's become more important to have an educated idea about the big picture.

The big picture is anything and everything that may have an impact on your marketing decisions for the year that are not already factored into your plans.

The top big-picture factors impacting my agricultural views include the dollar and its relative strength or weakness, gold, oil, hedge funds/institutional investors, and the big three economies of the U.S., Europe, and Asia.

The dollar

How affordable U.S. products are to the rest of the world will have an affect on the underlying price after supply and demand have done their work. A strong currency will make U.S. products more expensive to export and curb demand; a week currency will do the opposite.

Gold

Gold is a market harbinger for how much risk the market is willing to take and a good blood-pressure monitor for what the market is feeling. It is the beneficiary of a flight to a safe-haven in turbulent times. It's interesting to note as of late, when things have gotten extremely volatile, even gold can sometimes take a hit.

Oil

As gold goes for fear, oil goes for the economy. When things are looking better and considering no price rigging by OPEC or any demand issues, oil can be a judge of how people expect the economy to go and grow. If things look healthy, traders will buy oil in anticipation of good demand from a growing economy. A growing economy is good for agriculture as well as its ties to energy.

Hedge funds/institutional investors

Hedge fund money that has been poured into U.S. agricultural products has increased substantially over the last 15 years.
The chart below shows the new money that these funds have dumped in the U.S. market, and it has had a profound affect. Especially when there has been no return in the equity and fixed-income world, U.S. ag markets have benefitted from money managers searching for returns.

The big 3 economies

Let's face it, the U.S. is the main driver. But a healthy demand for U.S. products abroad is also a good thing. With good economic drivers in the EU, U.S. goods will be exported. And a better economy in Europe will help boost its currency against the dollar.

A great example of this has been the Chinese economy. Growing at an annual rate of nearly 9%, China has been a great U.S. customer and has arguably helped pull the rest of the western world out of its doldrums in 2008-2009. With its government trying to orchestrate a soft landing, China will be less of a customer for our goods as it has been in the past. Its appetite for agriculture may not change, but in the big picture it will almost definitely slow down its other demands.

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