Supply and demand are supposed to be the twin triggers for moving markets higher or lower. That’s why grain traders obsess over USDA reports, the main source for data about the size and usage of crops.
But growers were reminded this summer that their pricing mechanisms don’t operate in a vacuum of economic theory. Commodities of all stripes were battered by powerful waves spilling over from financial markets. What was happening in the field seemed less important than the ebb and flow on stock exchanges in China.
This isn’t a new phenomenon. Markets jumped off a cliff hand in hand during the U.S. financial crisis
of 2008-09. Since then, problems around the world regularly affect crop prices. Concerns about Ukraine and Greece, in particular, cast a bearish pallor.
Sometimes a connection is found between these stories and grain prices. A downturn in the Chinese economy threatened its ability to import more and more soybeans to feed a rising middle class. So it wasn’t unusual for soybean futures to show a strong correlation to prices on China’s stock market. More often, however, the connections are obtuse. Why would a default on Greek debt cause corn prices to swoon, for example?
Greece is too small to affect world trade directly. But concerns that the country might abandon the euro worried global currency markets. In times of trouble, money managers tend to reduce risk across their portfolios, selling everything and moving to the sidelines.
If this selling accelerates, it can feed off itself. A downturn on Wall Street may not affect the price of wheat at all in theory. But when money managers get a margin call in their stock accounts, it can cause them to sell other assets to raise cash and cover the losses. Keeping track of the storms in the market, and deciphering their meaning, is difficult because the barometers can change daily.
The dollar is often cited for price moves. In the past, conventional wisdom believed a stronger dollar was bad for grain exports — and prices — because it made the cost of U.S. originations more expensive. Little statistical evidence, however, backed this up. Moreover, over the last turbulent decade, the dollar sometimes strengthened when grain prices rallied. Other times it fell, even as the price of corn or wheat moved lower, too.
During the commodity bubble that preceded the bust of 2008-09, investors typically bought commodities as a hedge against a weak dollar. That dynamic gave way to a more complicated pattern recently. Some days the dollar strengthened because markets were bearish. Money managers bought dollars as a safe haven to park their cash while waiting out the storm. Other days a strong dollar was a bullish sign. Investors believed a growing U.S. economy would give the Federal Reserve confidence to raise interest rates. That positive spirit spilled over to other markets, as buyers came out of their bunkers.
Knee-jerk reactions to headlines are a minefield. Markets sometimes fell on bad news on the Chinese economy. Other times investors turned bullish on bad news, believing it would persuade the government there to stimulate its economy. In the long run, markets do focus on supply and demand. But short-turn disruptions can provide opportunities for growers to price crops at higher prices and buy inputs when the market stumbles.
Decision Time: Risk Management is independently produced by Penton Agriculture and brought to you through the support of Case IH. For more information, visit beready.caseih.com.