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An ever-changing grain marketplace
The last week has seen some big changes in the grain trade. First, CME Group officials expanded electronic trading hours. Then, officials on Friday announced they're seeking federal approval to expand open outcry trading hours so it's just underway when USDA releases key monthly crop production and grain stocks reports.
These changes have some major implications for both farmers selling grain on the board, as well as the brokers and companies -- large and small -- buying and selling both cash grain and futures contracts. Now, many players in the market say that a lot more than just historical market fundamentals now play a larger role in the trade, which will likely see even more volatility than it does now because of the latest changes.
With word that the CME Group's open outcry session will begin at 7:20 AM Central Time on days when USDA releases its major monthly crop production and grain stocks reports at 7:30 AM, it makes crucial the first seconds after those reports' release, says Johnston, Iowa-based AgTraderTalk.com market analyst and trader Kevin Penner.
"By 7:30:01 AM, the algorithm traders and headline-readers will have already taken position," he says. "7:31 will be too late and by 7:35, it will be old news even though normal traders still haven't read through page 1."
But, just because a broker or clearing house can make an instantaneous decision based on a scenario painted by a combination of USDA data and an algorithm created before that data's released doesn't necessarily mean it will be the right decision, adds Don Roose, market analyst and trader with U.S. Commodities in West Des Moines, Iowa.
"There will be people who run at it and die," he says. "They may take quick action, the numbers may be misinterpreted and by the end of the day the trade will level it out."
This latest round of changes at the CME Group go a few steps further in a trend that's been underway for the last few years. Rather than a fundamental commodity, many market-players will see the grains as an asset for valuation in a larger portfolio, Penner says.
"Grains now seem to be an asset that hedge funds and other investments can attempt to buy and profit from. Whereas in the past the exchange was mostly used by commercials as a means of hedging now it’s more like an online casino where big fund money can try and buy low and sell high (or sell high and buy it back lower)," he says. "The power that this big money has to move the market in a manner totally unrelated to weather or supply/demand is unnerving."
The latest change in an evolving market
This week's adjustments to trading session hours (both open outcry and electronic) are just the latest in a trading environment that's changed quite a bit over the last decade. Just a few years ago, a daily swing in the cash corn price of 2 or 3 cents, for example, meant a lot. Today, that's nothing, says Agriculture.com Marketing Talk senior contributor Canuck_2.
"I had a grain trader at an elevator tell me a couple years ago that it used to be if the market rose 2 cents, all the alarms went off and everyone tried to figure out what was happening," he says. "Now, anything less than a 20-cent move is just another day and nothing to get excited about."
And, as the trend toward wider price swings has continued, it's fed even greater volatility, says Roose.
"The movement in the volatility has picked up immensely in the last 10 years. Prices have moved to levels that we didn't think would be possible and sustainable," he says. Because of that, the Commodity Futures Trading Commission (CFTC) continues to expand limits, which opens up the volatility, and expands the volume that can be traded."
Then, there's the widening scope of factors grain marketers have to consider on an almost minute-to-minute basis in order to make informed trading decisions. Add to that the average farmer's growing ability to communicate better electronically everywhere he or she goes, and it has created an environment of massive and rapid data consumption. In other words, there's a lot going on in the world, a lot more of it affects today's grain prices, and there are a lot of new ways to keep up with both that news and what it's doing to the value of corn and soybeans.
"The news movement is much faster than it's ever been. We've gone to mobile news and markets to a smartphone," Roose says. "Our knowledge about what's going on around the world has improved."
While that capability is a good thing, the fact once external, unrelated factors are now weighing in to grain prices isn't the best thing in the world, adds Marketing Talk senior contributor GoredHusker.
"Marketing has gotten a lot more difficult in the past four years. Instead of relying on seasonals and weather, we now have to look at what's happening in Greece, Spain, et al," he says. "We have to watch out for an MF Global debacle. We have to look out for rogue traders from JP Morgan. There has become so much mistrust in the markets that I just sit here waiting for the next shoe to drop."
Situations like the MF Global bankruptcy and how it was handled by the CME Group have helped spawn the move underway to what many say will ultimately become an all-electronic trading index. Roose says the electronic trade is quickly becoming the norm; Penner says some 90% to 95% of CME trading is now done on the Globex electronic platform.
"The pit trade has become less of an issue because it's gradually disappearing," Roose says. "Electronic trading is moving to the forefront."
Aside from the growth in computer-based decision tools, like algorithmic trading, how will a move to an all-electronic trading environment affect farmers? Roose says it's likely to increase the use of tools like call and put options. Still, others say it could mean the electronic trade may be eventually populated only by algorithms and other programs that trade based on formulas set ahead of time by brokers and traders.
"With MF Global, wide cash basis not necessarily following futures prices, over 30% of market activity traded by large funds/indices, computer algorithm trading and other factors, we may be in a period of less of a need for the futures markets," says Marketing Talk contributor gregs3821958.
Adds Roose: "People will be more cautious than ever with options and calls."