Look outside of the normal fundamentals for guidance on the grains

Monday, April 06, 2015

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By Joe Camp

Risk Management Specialist

     The grains have had somewhat of an uneventful start to 2015.  Corn and soybean futures were trading a tight sideways range to start the year while wheat drifted quietly lower in the first quarter.

     Before traders were able to have a look at the USDA’s Prospective Plantings and Stocks reports, fresh fundamental input for the grains was limited.  But, while agriculture markets were starved for news, outside markets were not.  

     It has been an eventful few months for the likes of stocks, bonds, and currencies.  Metals and energy markets have also featured plenty of action.  External influences will have less of an impact on the grains now that the U.S. row crop season has kicked off, but outside markets still have plenty of potential to contribute a few shocks in the months ahead. 

     Traders of stocks, bonds, currencies, and non-farm commodities play an important role in price determination for agricultural goods because they direct money flows back and forth between investments with the highest expected returns.  If investors become skittish about stocks, they may park money in commodities and bonds, or vice-a-versa. 

     There are several storylines that will guide trading in outside markets this year.  The relative strength of the U.S. economy should continue to be the most talked about, with related implications having far reach. 

     Investors are tagging stocks with record valuations in response to the continued string of strong corporate earnings.  U.S. companies are flush with cash and they are hiring at an increasing pace. 

     Balance sheets may look strong, but stocks have benefited most from the Federal Reserve’s accommodation of low interest rates.  Expectations for the timing of an initial rate hike will be a guiding hand for equites in 2015. 

     As traders begin to price in higher interest rates, they are likely to funnel money into the commodity space as a hedge against lower prices for stocks and bonds.  Barring a massive sell-off that would spook buyers across all markets, the grains could enjoy a boost from investment money inflows. 

     Currency markets will continue to have a larger-than-normal impact on the grain trade.  A sharply stronger dollar has been a headwind for farm futures in recent months as it deteriorates the terms of trade for our exports.  

     Even at highs not seen for more than a decade, the dollar may still have more room to run.  Sustained U.S. economy strength and the anticipation of an interest rate hike are likely to lend support to our currency in such a way that places at least some pressure on grain prices.  

     A sturdy dollar may pressure energy prices, too.  Softer oil prices weigh on the grains in a number of ways, in part because of the drag on broader commodity market sentiment and also because of complementarities for the agriculture industry and its various fuel uses. 

     The fundamentals are likely to remain bearish for energy prices in the near-term, but the cure for low prices is low prices.  Cheaper fuel should begin to spark greater individual and industrial demand, providing one reason to believe that the energies could carve out a bottom and be less of a drag on the grains going forward.       

     Stock market performance, currency rate movements, and potential spillover sentiment from the energy space are just three of many external influences that are considered by grain traders.  All influences are part of an interlinked international economy that is managed within financial markets.  

     Grain traders will be keeping a close eye on economic developments in 2015, knowing that they dictate the direction of money that flows among the world’s various financial markets.  More than ever, our outlook for grain prices will have to account for much more than the specific fundamentals of crop production and use.