Under the Agridome

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A week ago, I had rain set in that has continued during the last few days and put a halt to my soybean planting. It has been made worse by extremely cold weather. Oh, in this agricultural game it is so hard to get everything right, as one of my readers told me this week; there's more rain in the forecast and this is so frustrating. Well, rest easy everybody, we've seen it before, and we've been here before. At the end of the day, we will get there.

As of May 22, December corn futures finished at $4.53 after a pretty good week. We are about $0.20 off the lows from a week ago. I wish I could say I was a prophet and could see that coming, but of course that is not the case. November soybeans finished at $10.55 which is about the same as what they were a week ago. July wheat is $5.44 a bushel, which is higher than it was a week ago, and we all know we want it to go much higher than that. A price spike in wheat would be very welcome, especially in time for harvest.

Of course, just like last week, nobody really knows what is going to happen. We have gone over the big crops that are growing in the United States with planting going ahead at a torrid pace. This all has the potential to do you know what. It all boils down to supply and demand with supply being the big winner for at least the last two years now. However, there must be a demand butterfly fluttering somewhere. Where could it be?

Butterflies in the commodity market are often thought of as something that you cannot see, but they're going on representing the start of something. That is a lot different than a black swan, which is an unknown surprise that unexpectantly comes into the market. We could use one of those too. However, butterflies fluttering somewhere within the grain market can be many things. Oftentimes, they're deep within the vestiges of what is called noncommercial demand. That is demand from managed money which sometimes can be instrumental in grain market direction.

What is noncommercial demand in grain markets? Typically, I think of them as speculators, hedge fund managers or anybody else that might be taking an investment position in the grain market. Yes, I'm very aware that some of my farmer colleagues might think of them as crooks and scallywags but really, they do add a good dimension to grain price discovery. They provide liquidity that helps us all when we want to sell an uneven amount of grain on some unexpected Tuesday. It's always very important to know whether the noncommercial traders are net short or net long in the grain market; sometimes this is close to grain movement.

At the present time, noncommercial speculators have a long position in both corn and soybeans. This is probably why we had some increased price movement during the last little while even though the crop is going in the ground at an amazing rate. Sometimes, or maybe even most times, changes in noncommercial demand is hard to make sense of; however, the key is to try to not make sense of it, but just be aware what speculators are doing. They can move the price of grain very quickly in either direction at a moment's notice.

I had mentioned that these noncommercial interests add liquidity to the market. In other words, in many respects they keep commercial interests more honest in their price discovery. However, we always have to keep in mind the commercial interests can sometimes manipulate cash grain basis levels especially in certain specific geography. In my mind, that's another issue, but having speculators involved in the grain trade can help mitigate some of these grain pricing irregularities.

So, grain prices are about supply and demand, but so many other things, including butterflies, speculators and the occasional rogue scallywag. Of course, in Canada we add in the gyrating nature of the Canadian dollar which closed Thursday at 0.7224 US, up almost a penny from last week. Keep in mind the currency markets have many of the same speculators trading the Canadian dollar, the euro or whatever other currency they desire that day.

As farmers, when it comes to grain price discovery, we are the people holding the bag. Keep in mind, as the weather warms up and the risks increase during the next few weeks, our noncommercial friends will decide which direction this thing is going to go. Remember the market butterflies and the black swans. It's all relevant. These grain prices just don't happen, they get discovered and there is a lot that lies within them.

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Philip Shaw can be reached at philip@philipshaw.ca

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