Farm Markets Are In A New Paradigm Shift
Over the last six months, it appears there has been a shift in market sentiment, with most futures contracts establishing an uptrend despite a rise in the U.S. dollar. Historically, there is a rather strong correlation to downward-trending commodity prices when the dollar moves in an upward fashion. As we look ahead and try to explain why this may be, we want to encourage both producers and end users to recognize that market volatility could be on the rise in the weeks and months ahead.
For agricultural commodities, 2012 was a benchmark year with drought conditions in the U.S. rocketing prices to all-time new highs. Since then, four consecutive large crops (both domestically and worldwide) have left prices in an environment mostly below cost of production. We believe this is, from a long-term perspective, also when end users recognize the value of cheap commodities and begin to expand their operations, leading to increased usage. Growing world demand was evidenced in corn with a reduction in world stocks-to-usage in 2016/2017 despite a record U.S. crop. In other words, demand is a springboard that could lead to higher commodity prices. With energy prices experiencing a major drop in early 2016 and now recovering, along with expectations that world crops will not continuously repeat the high yields that have occurred in recent years, speculative money is beginning to find a new home.
Since late August in most all major commodities, price setbacks have proven to be buy opportunities as uptrends are beginning to establish themselves. The Goldman Sachs Commodity Index (trading near 650 in 2014) dropped severely to 270 in early 2016, and is now trading near 405. This is a basket of commodities and gives some generalized vision of the entire value of commodities, as this basket is made up of 24 different contracts.
With volatility comes opportunity. Embrace volatility and look for ways in which to manage potential price movement in the months ahead. Markets have a tendency to move on perception as well as momentum and attitude. These variables are generally unquantifiable, and often apparent and visible when prices begin to make larger moves. Preparation is key. Row crop producers need to be respectful of what appears to be ample world inventories. Also recognize that, with a growing demand base, less-than-ideal weather could be perceived as a shortfall of supply and, consequently, cause rationing.
Therefore, it is paramount to have a strategy in place to reward price rallies, and also to cover these sales should less-than-ideal weather be a factor. In other words, prepare to manage volatility and market price movement, rather than allowing volatility and price movement to manage you.
If you have questions or comments, or would like help in creating a balanced strategy for your operation, contact Bryan at Top Farmer Intelligence (800-TOP-FARM ext. 129).
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