Navigating the Commodity Market
Chris Theisen - [email protected]
Commodity markets are markets in which any raw or primary products are exchanged or traded. To be more specific, Agricultural Commodities (beans, wheat, corn, oats, etc.) are the commodities that drive the cost of feed. This market can be difficult to understand and follow, even for the experts. To follow the markets, one must first understand some of the terminology used in them.
Bear market - A market condition in which the prices of securities are falling, and widespread cynicism causes
the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, negativity only grows.
Bull Market - A financial market of a group of securities in which prices are rising or are
expected to rise
Cash price – Price at which commodities can be sold for at the current time.
Future Price – price at which a commodity can be purchased at some point in the future.
Carry – Difference between the cash price and the futures price
Hedge - The sale or purchase of a futures contract to offset the purchase or sale of an underlying cash commodity in order to protect against adverse price moves.
Open – price at which the market opens.
Close – price at which the cash market closes.
Settle – official price at which the futures market closes.
Limit – maximum (or minimum) daily price change allowed above or below the previous close.
Once the basic lingo is understood, one can begin to follow the markets. However, there is a big difference from following the market to understanding it. To understand the market, it is important to understand the factors that drive it.
Oil Prices and Ethanol Production – As oil prices go up, so does ethanol production. Ethanol is produced from corn. Higher gas prices mean higher margins for ethanol production. Ethanol production will grow as oil and gas prices increase. In turn, the supply of corn will be reduced.
Weather – A wet spring or fall can lead to planting or harvesting concerns. Drought can have an obvious impact on the crop. Don’t forget to keep an eye on the weather conditions in South America. Remember, our winter is their summer, and South America’s crop can have a huge impact on commodity prices.
National Disasters – In May of 2011 the Mississippi River flooded, taking with it tens of thousands of acres of crop land. Farmers are estimated to loose two billion dollars in revenue. This will take crucial products out of an already stressed market. Pay attention to these things as they occur in an attempt to stay ahead of the market.
Crop Reports – Crop reports are nothing more than updates on how things are going throughout the season. They have a tenancy to drive the market, immediately before and after they are released. Crop reports give you a progress report on the current crop and they can change from report to report. These reports can be a valuable tool when trying to determine what the future will bring.
Stock Market – When the stock market is bad, investors may try and make money in the commodities market instead. This may drive prices up or down, but is not based on any “real” factors. It can cause big swings in the
market, but generally they are not sustainable.
International Influence – The commodity market is very much a world market. China is home to over one billion people. As Nations become more industrialized, their need to import corn will grow. Disasters such as the
earthquake in Japan will also cause demand to increase. Keep an eye on what is happening globally and try and get a feel for what world demand will be.
All the above factors have something in common. They are all related to supply and demand. Supply and demand drives the market prices up and down. Trying to figure out where the prices are trending requires one
to examine all the factors that play a role in supply and demand. Rarely will one factor alone drive prices, but a combination of them. Therein lies the key to projecting how prices will trend.
There are several sources that can be tapped to gain this critical information
1. Watch local commentary on the markets. Local stations usually have daily updates.
2. Read the agricultural section of the newspaper.
3. Subscribe to magazines such as Progressive Farmer or Corn and Soybean Digest.
4. Talk to local farmers – it’s their livelihood…expert consultants are never a bad idea.
5. Sign up to receive daily market updates via e mail at farmfutures.com
6. Farm Futures radio is a free service on farmfutures.com that offers expert analysis of the market.
7. Get up to the date market prices at cmegroup.com. Also offers graphs on price trends.
Given the fact that feed prices fluctuate with the markets, understanding the market is critical when making decisions about feed. Don’t rely on luck or someone else’s opinion. Judge for yourself and make your own decisions. Flying blind in today’s market is a risk than no-one should be taking.