This summer’s spring wheat rally has been stunning and exciting, especially if you are a farmer who has some of the crop in the bin or a good crop in the field.
It’s more bittersweet if you have a drought-ravaged crop with poor prospects.
It’s also been a nostalgic time for veteran crop market watchers (like I now feel I am) because this rally and its aftermath seem much like the rallies that used to dominate the crop markets before the era of the “commodity boom” or “commodity super cycle.”
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The 2017 spring wheat rally wasn’t driven by crude oil values, outflows of “hot money” from stock and bond markets, dreamy predictions of a golden age of global growth or “risk-on, risk-off” behaviour.
The rally this summer was the product of widespread drought in a specific crop’s core growing area and the scramble by commercial users to cover their needs.
Once the grain companies, millers and processors had their needs hedged, they just walked away from the market and it fell.
Speculative money has played a role in the rally, but so far only a supporting one, adding liquidity and strengthening the up and down trends, but not leading them.
In that way it has seemed like the markets I covered from the late 1990s to mid-2000s, when traders and analysts I regularly called would almost always bring up commercial hedging actions first when talking about markets. Since about 2006 that hasn’t generally been the case. Commercials were often an afterthought or not even mentioned.
I called a couple of analysts who were around before, during and after the commodity boom, and they confessed to the same nostalgic feeling this summer.
“It’s kind of refreshing that it’s not just (the market) chasing hot money,” Jon Driedger of FarmLink Marketing told me.
“In some ways it’s a pure weather market rally because the other commodities haven’t been very sexy for a while.”
Darin Newsom of DTN said this rally was free of the distracting elements of the commodity boom, leaving the market mostly in the hands of the people who actually use the commodity. This was all about the crop itself.
“It has a completely different feeling about it now than it did (during the boom),” said Newsom.
There were definitely crop-related rallies during the commodity boom, including the incredible spike in wheat prices in 2008 and the corn and soybean rally of 2012.
However, the heights those rallies reached had as much to do with the overall commodity rally as they did with crop scarcity. Minneapolis spring wheat futures rallies in 2008 and 2017 look similar in shape on a chart, but in 2008 prices peaked at US$25 per bushel while this present rally has peaked so far a little below $9.
That $9 is much closer to the commercial value of hard red spring wheat than $25.
There has been a great evolution in the crop futures markets since the early 2000s with electronic trading, new pools of commodity-related investment capital and a greatly expanded world capital pool adding dynamic elements to a futures trading system that hadn’t changed much before 2000.
That’s brought a lot of good for farmers with easier and cheaper ways to use futures markets for their risk management needs.
However, the flood of outside money and the non-crop-related elements of the boom often made crop futures a dangerous tool for farmers and commercial users.
That seems to have changed now.
In the post-boom era, crop markets appear to have settled back into their traditional focus on production and commercial demand. Prices might be lower, but the market provides a price discovery and hedging system that makes a lot more sense for farmers and buyers.
