It’s often said that grain markets are volatile. To a certain extent this is true, although it’s probably more accurate to describe it as bouts of volatility within periods of relative tranquility. Many grain markets are going through one of those ‘boring’ stretches right now.
The November canola futures contract has spent the past three months trading within a relatively narrow range. The ranges are a little wider for corn, soybeans and winter wheat, although this is due to a steady grind lower through the summer and early fall rather than erratic price moves. In many cases the day-to-day changes are minor.
Why is it that markets can be so volatile at certain times, and so mundane during others? Most of the time market volatility spikes when uncertainty increases. Prices are determined where supply and demand intersect – whenever either of these factors come into question in a significant way, the market has a difficult time determining the ‘right’ price. The growing season is a classic example of this. Yield estimates swing with every weather forecast, which is why this is a time of year when prices tend to be most volatile. Markets hate uncertainty, and give us erratic price moves as they figure things out.
Market volatility is also higher when the balance sheet for a crop is tighter. In these scenarios every bushel of grain that is ‘gained’ or ‘lost’, either through changes to production estimates or adjustments to demand projections, is of greater importance when the market is concerned about whether there will be enough supply to go around. The level of urgency drops significantly when there is more cushion to fall back on.
All of this brings us back around to the current environment. While harvest isn’t yet complete, it’s far enough along in the Northern Hemisphere that most traders have a pretty good sense of what the final outcome will be. This mindset already started to take place in the second half of summer when the crop was already fairly well advanced and the long-term forecast looked relatively non-threatening. In other words, the ‘supply’ side of the equation is becoming increasingly less uncertain. In addition, most crops are looking at fairly comfortably stocked balance sheets. This reduces the urgency on the part of end users that can drive prices higher when supplies are tight. Overall, there just aren’t many reasons why markets would need to be more erratic than they recently have been.
It is worth noting that even at their sleepiest, grain markets are more volatile than many other assets. For example, U.S. stock markets haven’t seen a 5% correction in 400 days. Grain markets will easily move that much over a couple of weeks even when there is nothing particularly dramatic happening in the market, or see that kind of swing over the course of a day or two if, for example, a government report comes in out of line with trader expectations.
But before we settle in for our long winter’s nap, keep in mind that a low volatility environment won’t last forever. The uncertainty of the growing season may be behind us, but there is always another shock around the corner. Of course, one usually can’t see them coming – there’s a reason why they are referred to as ‘surprises’. As a farmer, the important thing is to be prepared and know how you are going to respond when that next inevitable big price swing comes.