Grain markets have raced higher in recent weeks, but there is no consensus about whether it is time to sell or to wait for the rally to continue.
That’s because this rally is driven by unusual investment fund buying for reasons far outside the usual dynamics of crop markets.
“These are different commodity funds than we normally talk about,” said Ken Ball, a broker with Union Securities in Winnipeg.
“Some of these are international hedge funds, and some might be funds based off of commodity indexes.”
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Usually, the speculative action in grain futures markets is dominated by commodity funds that concentrate specifically on the grain markets, rather than these broader-based funds that invest in many commodities.
Some analysts say these funds have roared into grain futures because crops seem to be the only undervalued commodities in today’s markets The funds are desperate to replace U.S. dollar investments with commodity investments.
Commodities are generally considered a good investment when currencies, such as the U.S. dollar, are in trouble. A currency’s value is based on an abstract idea of the general worth of a nation’s economy, while a commodity has some value because it is an actual physical substance.
A currency can become a worthless piece of paper, but a commodity can always be used for something.
The most famous commodity that benefits from weak currencies is gold, to which investors flock when they are worried about the U.S dollar.
In the past year as the value of the U.S. dollar plunged, the price of gold has soared.
But now, almost all commody prices have soared. Metal prices have blown through the roof and oil has reached heights that most analysts say are unwarranted by supply and demand fundamentals.
The fundamentals for higher grain prices look poor, but in contrast to the radical rise in prices of other commodities, grain look like a bargain.
“If you’re looking for the best buy, grains are the bottom of the barrel. They’re the cheapest,” said Errol Anderson, a broker with Pro Market Communications in Calgary.
The recent price run-up can be partly justified by the problems with the Brazilian soybean crop, analysts say, but the rally has gone beyond simple supply and demand.
“I think this is the start of a recovery in grain prices,” said Anderson.
“I don’t know where we’re going, but all I can sense is that we’re going higher. The market mentality is to buy the dips.”
To “buy the dips” is to buy more of something every time the price drops, so Anderson thinks funds and other market traders will keep the market moving higher even after sell-offs. Each sell off will be a breather before prices begin rising again.
Anderson said he generally believes price outlooks should be based on fundamental supply and demand data, but the massive invasion of commodity funds into grain markets has caused him to temporarily follow technical analysis instead.
“The funds are like a freight train. You do not get in front of them. They will run you over,” said Anderson.
“Stay long. Don’t fight it. They’ll bowl you over.”
Anderson said fundamentals may not justify the sudden rise in grain prices, but they don’t seriously undermine them either. Supplies are not so large and a significant weather problem somewhere in the world could give real fundamental justification to a rally.
“Even though we have surpluses now, the traders on the floor are now saying what are the chances we’ll have another year of perfect weather.”
Ball thinks the odds are against a continuing rally.
“In the grains, it’s a real struggle to find anything to allow these prices to hold. They’re cheap for a reason,” he said. “It may be a little too early for a rally.”
Ball’s analysis makes him think now is a good time to sell any unpriced crop left in farmers’ bins.
“It’s a good time to move old crop.”
If new-crop canola reaches the $310 per tonne level, he’ll start recommending farmers lock in some new-crop 2005 prices.
Anderson thinks it’s too early to lock in prices for old or new crop.
“This is the start of higher prices.”
He suggests farmers lock in attractive basis levels if they can find them, but leave the price alone for a while. Even if prices suddenly slip, it will probably be a short-term correction.
“We could lose 50 percent of the rise on a sell-off, but then it will start back up again,” said Anderson.
“There’s a changing world out there. When we’ve got $55 US oil and $2 corn, something doesn’t make sense. Something’s out of line.”
