Under the Agridome

Wet springs can be cruel. In this part of the Ontario, we have been inundated with rain the last part of May effectively keeping me out of the fields for the last two weeks. I must say that "hurrying up and waiting" for things to dry up is not a natural part of the farming psyche. However, there are lots of times throughout the year whether it is planting or harvesting that's what we do. Every year I always like to get my soybeans planted in May but invariably that never seems to happen.

It is important in these times to not assume that everybody is in the same situation that you are. For instance, even within Ontario there are areas of the province that are all planted with crops looking good. On top of this we have had really good planting progress across the Corn Belt.

For instance, on June 2 the USDA reported that corn planting is 91% complete and 2% above the five-year average. Soybeans were 78% planted as of the same date.

So, as I look out on the flat plains of Dresden, Ontario, the greater grain world isn't as it seems around here. As it stands now, it looks like we're off to a great start at another record crop North America wide.

Corn and soybeans trading algorithms have not been looking the other way. For instance, as of June 6, corn futures prices are down about $0.35 since May 15. Soybean prices have dropped $0.55 since May 28. It would seem that our trading algorithms already think the crop is made.

In the old days as of about 20 years ago, I actually used to personalize the trading at Chicago. Sometimes, I would refer to the traders as "pinstriped pirates" reflecting how some farmers viewed the integrity of the actual physical human traders on the CME floor. However, as we all surely know now, that is gone -- replaced by computers that do almost all the trading. With the dawn of AI (artificial intelligence) in the last few years, these algorithms will surely get more precise.

I was thinking about this last week when I read an article about algorithms being used to control gas prices in Canada. As everybody knows, almost everybody who drives a car keeps track of what gas prices are. The nuance in the article pointed to the use of algorithms to control what gas prices were. It was a bit of a stretch, but I found it perfectly understandable how these prices might be "tuned up" by an algorithm reflecting the intentions of its owners.

Thinking that, my thoughts immediately went to how grain futures prices are determined by algorithms. Keep in mind, I don't think there is any nefarious outcomes by algorithms doing the trading in Chicago. In fact, at first glance my assumption would be that it adds greater liquidity for the benefit of everybody, including farmers. However, in the cash grain market I could see how it could work the same as the gasoline market limiting options in certain market areas.

Keep in mind that in 2024 anybody can have an algorithm. All you need to have is a little bit of computer coding moxie, lots of math background and a little determination. Translate that to bigger firms with greater resources and algorithms are everywhere.

I recently read part of a Master's thesis in Agricultural Economics and Business from the University of Manitoba, done by Neda Arzandeh. In the master's thesis she measured effective algorithmics trading for wheat, soybeans, corn, lean hogs and live cattle. This took place between December 2015 and March 2016. It was an interesting study, great tangible agricultural economics, something that I can really bite into. There were many conclusions, but one of them was that it increased the market quality of price transparency. In other words, algorithms decrease the cost for traders and also increase the efficiency price discovery for end users such as farmers.

That all makes sense to me with regard to grain futures prices. However, as I've told you many times, grain futures prices are easy to comprehend versus cash grain prices. Cash grain prices are much more subjective as basis is like an elastic band constantly moving and sometimes incomprehensible. In eastern Canada, basis has a life of its own cloaked in secrecy among the private merchandisers. Stateside, it is much more predictable especially in areas deep within the Corn Belt.

Keep in mind in June of 2024 all of these grain futures trading algorithms are dialed in. In other words, if it gets "hot and dry" they're going to buy and if it continues on the status quo as it is now, they're going to sell. They also have black swan events dialed into them. It also should be noted that these algorithms are always constantly tweaked by humans who own them. It's all part of what makes a grain price.

When I started writing this column 38 years ago, this was the stuff of science fiction. However, it is not necessarily a bad thing, more about enhancing futures price transparency. In our current grain price environment that might give you pause. However, keep in mind, someday, when grain prices are screaming higher, it's those algorithms doing it. They never take weekends off and never get tired.

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Philip Shaw can be reached at philip@philipshaw.ca

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