Global financial markets are so volatile, we can’t help telling ourselves. Can we really expect grain markets to have long-term strength when the economic times are so turbulent?
My question is slightly different. Can market analysis help us find a commodity market’s long-term direction, when there’s a long-term direction to find?
Commodity markets produced many success stories in the last two years, but financial markets have delivered at least as many bumps and bruises. Global credit markets have tightened and Europe’s crisis has been unrelenting. Even American debt continues its spiral.
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But grains? There are so many mouths to feed out there, we tell ourselves. The world’s population is accelerating, which surely means that demand has got to grow. So grain prices should be strong, shouldn’t they?”
Markets can be like a giant puzzle. They can be exciting, intimidating, frustrating and rewarding all within a matter of days. Even better — assuming you like excitement — markets are always moving targets, and commodity markets are the most volatile of all.
So lets take a look at the nature of today’s markets to see if current prices do have longterm staying power. Then we’ll dig into the nuts and bolts of how to market in these volatile times.
One point needs to be made loud and clear. Typically, bull commodity markets have a short shelf life. They don’t last. Prices soar, but then eventually drop more quickly than they rose. Markets are a reflection of human emotion. The market cycle of greed, followed by hope, fear and panic continually repeats itself.
Bull markets always soar to a mighty peak and then collapse, with the peaks often showing a needle-shaped top.
Even so, overall grain bids may trade at new, higher levels even after the scare has settled down, and it’s often during these subsequent market rallies that the best selling opportunities are found.
Sound crazy? It can be. Opportunities appear, then disappear.
Marketing your grain through volatile and uncertain times can be highly stressful, or it can be extremely profitable, depending on how it is handled. Market planning dictates how well a grower handles pricing opportunities and profits.
So the question remains, is there a long-term direction in markets? Can they weather the storm of global economic uncertainty?
The quick answer is, “it’s unlikely.” 2012 will no doubt be a year of commodity price turbulence. With global economies waning due to excess government and personal debt loads, commodity prices will feel the pinch and strain. In fact, there is a possibility that commodity prices in general may actually turn somewhat deflationary.
At the same time, however, we need to stir in weather markets and geopolitical events like Iran. Inevitably, this suggests another year of significant volatility.
In this mix, grain prices simply don’t have long-term direction. Pricing opportunities will no doubt appear, but they won’t last. We simply can’t expect market strength to hold for the long haul in a world that is struggling with its economy.
Commodity analysts now watch stock markets and currency rates each morning for their influence on commodity prices. And amid tightening monetary policies, the law of substitution will quickly try to compensate for product shortages and oversupply. This is the world we now live in.
Key factors that will impact our markets this year include the strength of the U.S. dollar, the price of crude oil, geopolitical tensions and of course, weather. Despite spiralling American deficits, the U.S. dollar is still a safe haven, meaning the American dollar typically rises as global risk rises. This can act to pressure our Canadian dollar lower, and a falling loonie is ultimately a huge benefit for exporters and manufacturers.
Geopolitical tensions such as the Iranian nuclear situation will also impact crude values. Should global tensions heighten, oil prices will rise, but the opposite is true too. When world tensions subside, the premium built into oil values may fade rapidly.
The price of crude oil does impact ethanol values which in turn affects not only affect pump prices but corn prices as well. This movement in currencies and energy prices ultimately affects the health of the North American agricultural markets.
So do our markets have long-term direction? Can bull markets be sustained for the long haul? Commodity prices are affected by many global economic factors beyond the law of supply and demand. That’s the new reality nature of our markets.
Even so, the old saying that the cure for high prices is high prices will hold true just as the cure for low prices is low prices.
The worst business strategy is to be complacent and to do nothing to guard profits. Never assume hot markets will hold. They won’t.
Make sure you have a marketing plan in place. Manage your risks. With effective marketing, 2012 will be exciting and profitable.
