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“The function of price is changing” warned Driscoll. Outside influences such as fund buying and selling, currency markets and volatility often have as much to do with daily price movement as crop
conditions, or a major export sale. “Commodities used to be laughed at” said Driscoll, “but are now the hot industry to be in. Traders used to focus on fundamentals A, B, C and D, and now we talk about what
Goldman Sachs is doing.”
Driscoll pointed to some unique market behaviors that have occurred in the past few years, notably the rally in Minneapolis spring wheat futures during 2007 and 2008. “Did a balance sheet really cause
spring wheat to be worth $6.50 in September at harvest, $22 in February, and then $8 before the new crop was harvested?” He had similar head-scratching charts showing price movements in soft red winter wheat, and
in all cases, you cannot look at a balance sheet to find the answer to the why such price volatility occurred.
When looking at the price outlook for corn, wheat and soybeans, Driscoll began with the corn story, which he emphasized is the major story in U.S. ag commodities right now. There is a record tight
stocks-to-use ratio despite record production in many countries, but the cure for high prices is high prices. Since 2007, U.S. demand has begun to flatten, and the high prices are encouraging large increases
in Black Sea corn production, as well as China. “This land is meant to plant corn” said Driscoll, referring to the Black Sea region, which could become a much larger producer in subsequent years, if corn prices
remain high.
On the wheat outlook, with virtually no supply problem across the globe, the wheat market struggles and follows on the heels of corn. Wheat is pricing itself as a feed grain, with plenty of low quality wheat
available from the U.S., Germany, Australia, and even Argentina. “Quality and protein is the only story, and it could get worse if the Canadian Wheat Board situation restricts spring wheat supplies” says
Driscoll.
With the balance sheet updates out of the way, Driscoll focused his attention on the outside influences, mostly the speculative and index fund participation. “We must always respect the fact that our
market serves many functions for different participants” advised Driscoll. There is an estimated $300 billion invested in long only commodity investments, which includes non-ag commodities as well. “People
forget or fail to realize how small our space really is. $15 billion buys the whole wheat crop, and $75 billion buys the whole corn crop” reminded Driscoll.
Index funds are those that buy and hold commodities, and the major problem for markets is the lack of liquidity. In December, index funds owned 1.75 billion bushels of corn, which is twice the U.S. ending
stocks, and they owned forty percent of the long positions in Minneapolis wheat. This can cause futures price distortions, and Driscoll pointed to increased volatility in basis as one way the cash market is
adjusting to the new players in the futures market. “Basis has to work harder at controlling grain flows due to volatility in futures prices, “said Driscoll.
The speculative funds are an entirely different category, and can go long and short, and their size has grown over time. When combined with the index futures, they can create massive volatility in the
markets, especially when their positions clash. The bigger the index fund position in a certain market, the more liquid the market can be when the speculative funds move their positions. It can be very difficult to
buy and sell when one group of traders, the index funds, are buying and holding. This lack of liquidity can lead to large price swings when the speculative funds decide to increase or decrease their presence in a
market.
In addition to index and spec fund participation, Driscoll pointed to electronic trading as another factor changing the way our markets work.
Electronic trading has opened access to many markets, and makes more complex trades such as spreads easier to execute. The ease of electronic trading can be partly attributed to increasing volume and trade in
the commodity markets.
While the supply and demand tables, and USDA reports will always be a major factor in grain prices, Driscoll’s discussion of the speculative and index funds and electronic trading was a good reminder that
price discovery is not always based on fundamental factors. The increased presence of speculative and index funds has changed price discovery, but the commodity markets do serve many masters, and farmers are just
one of them. Just be prepared because it may become more difficult to find a specific reason why prices moved up or down for the day. Driscoll did suggest that farmers are becoming more powerful in the grain markets
as well. “Just think, if five percent less farmer selling this year equals the entire corn carryout, we run out of corn,” said Driscoll. It may seem like farmers are helpless when it comes to crop
marketing, but Driscoll’s corn analysis reminded the audience that farmers are still in charge of the cash commodity.
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