0utside investment money has always been a fact of life for grain markets. Whether it’s day trading or taking longer term positions, speculators make up a sizeable part of volume and open interest. How large a portion varies over time. There are periods when grain markets are ‘sexy’, with markets rallying, prices making big daily swings and news networks putting reporters on the floor of the CBOT to report on the latest USDA report.
Then there are those times when outside investors lose interest. The current environment is one of those times. We have gone through a period when both prices and volatility are relatively low. Traders make money when prices are moving around, and we have now gone through several years where values have been bound within a relatively narrow range. Of course, there are stretches when the volatility picks up, such as during weather scares during the growing season. But to the outside observer, the grain markets over the past few years have mostly been boring.
It’s not just the grain markets that have fallen out of favor with outside investors. Commodities in general have lost their luster, as everything from energy to metals are simply not showing the dynamism that was witnessed during the ‘go-go’ days of a decade ago.
Is sentiment starting to change? There are a couple of narratives swirling around that might suggest this, even if they are mostly only a hypothesis at this point.
One is the idea that stock markets and bond values are expensive, while grain prices are cheap. If something triggers a downside correction in those markets, such as due to further tightening of monetary policy from the Federal Reserve, then money will look for a new home. Some of this will flow into grain markets.
This line of thinking is questionable. A correction in financial markets is likely to coincide with a ‘risk off’ attitude, hardly the sort of environment that would see funds flow into ‘risky’ commodity markets. This is particularly the case if grain fundamentals remain relatively benign, as is currently the case.
Another idea is that inflation is creeping higher. In this context there is value in owing ‘stuff’ as opposed to, i.e. fixed income assets that fall in value as interest rates rise. This theory has some merit if we do start to get some evidence of inflation picking up. The key word is ‘if’. There is some speculation that we are entering a key turning point in terms of economic growth, potential inflation, and the subsequent response on the part of global central bankers. However, analysts are deeply divided on virtually every aspect of the ‘who’, ‘what’, ‘where’, ‘when’ and ‘how’ of the way things might unfold.
What does all of this mean for farmers? First and foremost, stay disciplined to your marketing plan. The shifting of the wider economic tectonic plates often happens slowly and unpredictably – don’t let outside ‘noise’ distract you from the decisions that need to made in the next 6 – 12 months. Second, remember that the most important driver of grain prices over time is the underlying fundamentals. Fund money flow can cause an overshoot one way or the other for a period of time, but weather, exports and other traditional factors are the most important longer term factors. Finally, any volatility can create an opportunity, particularly if it causes a temporary spike in values.
Speculative money flow, and the underlying factors that drive it, are an important part of grain markets. But let’s not allow outside stories to distract us from the more immediate task of getting the most value for this year’s, and next year’s, crop.