Posted on August, 1, 2024 at 09:18 am
Price fluctuations of inputs and outputs have been like a roller coaster for the past few years, leaving producers rattled. For farmer marketers, identifying the difference between price shocks and long-term pricing trends can help create focus in the chaos – and eventually, better profitability.
“Currently in most of our markets, prices are still historically high. We're in the top third, if you look over the last 10 years or so,” said Andrew McKenzie, associate director for the University of Arkansas Fryar Price Risk Management Center. “I think the harder thing for farmers has been input costs have also been very high. It doesn't necessarily mean that because the futures are in good levels, or even the elevated cash price, that they're making bags of money.”
Paying attention to the way current market trends align with previous years helps remove some of the immediate pressure and emotion from grain pricing decisions. However, just identifying a trend doesn’t consider what the pricing means for farmers’ profitability, especially base costs, inputs and family living expenses, all of which put pressure on a farm’s bottom line.
Pure commodity markets like grain find price footing based on available supplies and consumer demand. Following current announcements about local, national and global commodity supplies can help producers make marketing decisions in line with the highest possible price points.
“I think a key piece of information is the WASDE, which is a report that comes out every month, and summarizes where we are with supply and demand. The key number that everybody gets out of that is what ending stocks will be for the current marketing year,” McKenzie said. “What that reflects is whether there a shortage or surplus supply in the marketplace. And then often divided as a ratio by looking at what the projected uses are going to be from both domestic and export markets. And the higher that number of stock to use, then the lower the price will tend to be.”
Typically economists will look at supply and demand graphically, with stocks to use on an x axis and price on a y axis, with the curve depicting the resulting relationship. From a farmer’s point of view, McKenzie said the most relevant information comes from the combination of available supply and demand data as well as historic reports from previous years to identify a predictable price range for the coming season.
“At the beginning of the year, the January, February and March reports are strong reflections of what's happened from last year. The projections about what's going to happen this year are less firm,” McKenzie said. “Crops haven't even been planted that early in the year, and it's going to take through the summer before we know what yields are likely to be. I think the important thing is to keep an eye on those reports each month, as we go toward harvest.”
Price shocks arrive in the form of domestic or international shifts in supply or demand. Shocks are often highly publicized, could be politically aligned and cause temporary price disruptions.
“Export markets are very important to us, certainly for corn, soybeans, and wheat. There are certain events that might happen, which dramatically impact prices,” McKenzie said. “For the most part, unless it's an unexpected event, the market is good at assessing what those export numbers are going to be long-term. The major shocks which really disrupt price are more typically on the supply side.”
Although major events may sound profoundly impactful for current prices, McKenzie said the market basics of supply and demand often help soften long term impacts.
They tend to be what I'm calling a shock to the system. It's hard to really get any sort of long-term trend analysis based on that,” McKenzie said. “I think wherever the market is currently at is already capturing that export impact into it, from my point of view.”
Can outside trading or speculative commodity traders impact pricing? McKenzie said the impacts of financialization of commodities is a well-debated topic.
Essentially, investment companies would attempt to enter the market to get exposure at certain times to gain a return on investment in commodities. “Spec traders” actively try to guess commodity trends, in hopes their trading will return profits.
Add in AI-based training programs to trigger quick commodity sales or purchases and the overall climate for commodity trading is vastly different than in previous decades. Despite the differences in the appearances or motivations of current market traders, the overall impact on market dynamics is still relatively low.
“My take on it is ultimately, anybody who's trading whether it's through AI or whatever, they're still going to be disciplined by whether they make money or lose money,” McKenzie said. “They should be geared towards what they believe the market price should be, and if they believe it's wrong, take a position. Anybody who's willing to take the position is also willing to take that risk, and that moves the price to where it should be more quickly and efficiently.”
From a price discovery perspective, traders making trades they believe in – whether those trades are profitable or not – help expedite proper market pricing.
“They bring liquidity to the market. For anyone who wants to offset risk, you must have someone on the other side. The more people who are willing to take the opposite position, the cheaper your hedging or risk transactions become,” McKenzie said.