Western Producer reporter Sean Pratt attended the Commodity Classic, a gathering of 4,000 American wheat, corn and soybean growers in Florida last week, to see what Canadian farmers might expect from their southern neighbours.
TAMPA, Florida – Growers should stop poring over the latest supply and demand statistics and simply start listening to what grain markets are telling them, says an industry analyst.
It is easier and usually more profitable to use the market’s signals and tools rather than trying to predict where prices are going, said Darin Newsom, senior analyst with DTN Market Access, a firm specializing in providing commodity market information and analysis.
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“There have been times when the market may try to change direction off of a report,” he said during an interview after a presentation he made to delegates attending the 2007 Commodity Classic, a conference for the U.S. corn, soybean and wheat industries.
“It just doesn’t happen very often.”
What is far more important is for growers to get a general sense of which way the market is trending. A producer’s hedging strategy should work with the trend, not against it.
That doesn’t come from talking to the commercial side of the business – the brokers, exporters and processors. He said it comes from following what the speculators are doing – the commodity, hedge and index funds.
The buying and selling activity of non-commercial traders has a strong correlation with market trends because large institutional speculators know how to make money. It doesn’t matter if it is Chicago corn or Winnipeg canola, he added; they are the drivers of the market.
And while a U.S. Department of Agriculture supply and demand outlook may cause a blip in the market, it won’t derail the trend set by the non-commercial speculators.
“These guys are looking at the long-term. One report isn’t going to change their opinion; it’s going to take a series of events,” said Newsom.
In the United States, the Commodity Futures Trading Commission releases a report every Friday detailing the position of non-commercial traders. There is no such report from the Winnipeg Commodity Exchange, but Newsom has a contact on the floor who provides him with a rough estimate of what the non-commercial traders are doing.
Once growers have a bead on the trend, they need to look at the spreads between the nearby futures month and the deferred contracts. The spread between them helps indicate when to sell and when to hold. Sometimes it can be confusing, but the key is not to try and outguess the market.
Through most of February, for instance, crude oil and soybean futures generally trended upward based on unchecked non-commercial buying interest. Yet commercial spreads widened, indicating that the short-term fundamentals were bearish.
The uptrend said it may be time to make incremental cash sales, but the spread said the time to do those sales may not be in March.
As a result, soybean growers might want to lock in for a July contract. Producers simply listen to what the market is telling them, Newsom said.
He also encouraged producers to properly manage margin risk.
There are certain times of the year when option contracts are overpriced. Generally when markets spike, so do the exchange costs or margins.
“If we’re just going into a time of year when the market begins to rally, maybe we pull back and we don’t hedge as much and therefore we alleviate the margin risk,” said Newsom.
A good rule of thumb is that grain typically posts a low at harvest when supply is plentiful and a high during planting season when producers are too busy to deliver grain or when supplies dwindle late in the marketing year.
When the markets are hot it may be time to look for cash strategies. When they calm down it may be time to consider using puts or calls. The goal is to keep the costs in check.
“That will allow you to stay in the market longer,” Newsom said.
