'Big' events buffet commodity markets

by Ron Sterk
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While supply and demand fundamentals may ultimately determine the price of grains, oilseeds and other basic ingredients, the influence of outside markets to create price volatility were obvious last week when nearly all markets from equities to agricultural commodities to crude oil and especially to gold futures prices plunged on April 15, only to partially but quickly recover on April 16.

There has been no shortage of market-moving news, both fundamental and outside, for commodities since March 28, when the U.S. Department of Agriculture released its benign annual Prospective Plantings report and surprisingly bearish quarterly Grain Stocks report. Those were followed by the U.S.D.A.’s April 10 World Agricultural Supply and Demand Estimates, with mostly expected domestic forecasts for grains and oilseeds but some surprising world numbers. Then came April 15, which was significant not only because it was “tax day” in the United States, but also because events in China and in Boston rocked nearly all markets globally.

As terrible and senseless as the terrorist attack at the end of the famed Boston Marathon was, it was China that had the greater market impact on April 15.

While China always is a market factor in soybeans as the world’s largest importer of the oilseed, it also has been a factor in grains with purchases of corn last year and recently purchases of U.S. soft red winter wheat. While there has been partial confirmation by the U.S.D.A. of soft red wheat sales to China (360,000 tonnes reported on April 11 for shipment in the marketing year that begins June 1), the trade insists the sales number is much larger at 1 million bus or more.

As important as China is as a grain and oilseed buyer, it’s equally significant, and potentially market-moving, because of its economic prowess and energy use.

China, the world’s second largest economy after the United States and one of the fastest growing, shook overnight markets when it reported on April 15 its first-quarter gross domestic product grew “only” 7.7% from the same period a year earlier, along with other disappointing economic data. While the United States may only dream of 7.7% G.D.P. growth, analysts had forecast 8% for China, and the growth had slowed from the fourth quarter of 2012.

But China is just one of numerous factors that may drastically or sometimes slowly but steadily move the markets. Sabre rattling by North Korea recently has added an edge to the markets, especially equities, not unlike similar threats from Iran have impacted energy markets in some years past.

Then there are terrorist actions such as the explosions in Boston on April 15 that killed at least 3 and injured more than 140 persons. The day sessions of the agricultural markets were closed by the time the news hit, but U.S. stock markets still were trading and losses piled on those already inflicted by the Chinese data, ending down about 2% for the day. While no terrorist action has yet rivaled the impact of Sept. 11, 2001, all have some impact, albeit usually short-lived.

Perhaps the most drastic impact was on gold futures in New York, which plunged about $140 an oz, or 9%, on April 15, the largest one-day drop in more than three decades, ending at a two-year low.

The impact of price swings in equity indexes, bank failures in Cyprus or bombs in Boston illustrates how interconnected markets are, both domestically and globally. In a much too simplified example, a downturn in Chinese economic activity can slow factory investments that can depress stock prices, or slow crude oil demand that is priced off New York futures, which can pressure ethanol prices and demand, for which 40% of the U.S. corn crop is used, impacting cash corn basis levels at a corn syrup plant in Eddyville, a town of about 1,000 on the Des Moines river in southern Iowa, where nearby farmers are preparing to plant corn.

Or, a drought in New Zealand may reduce milk production there and exports of dairy products to Asian markets, which then must turn to European or U.S. suppliers, driving up prices for skim milk powder and other products as export demand increases, and increasing demand for soybean meal or corn, which just got cheaper because of slower G.D.P. growth in China, which may have bought milk products from New Zealand.

Then there is the impact of hedge funds that has changed the dynamics of commodity futures in recent years because funds buy and hold large futures positions rather than traditional traders’ shorter-term turnover related to more fundamental or crop cycle factors.

The list could go on.

Weather by itself would provide plenty of volatility to agricultural markets in most years, and 2012 and 2013 are prime examples. A year ago a historically warm early spring jumpstarted fieldwork and the growing season, then a devastating drought across the Midwest took its toll. This spring is nearly the opposite with wet, cold weather persisting, resulting in planting delays, while late freezes eat away at the already drought-reduced hard red winter wheat crop.

A glance at the continuous nearby corn futures contract since Nov. 1, 2012, serves to illustrate the market’s volatility caused by any number of factors. Corn futures closed at $7.51 a bu on Nov. 21, fell 4% by Nov. 12, rose 6% by Nov. 28, fell 9% by Dec. 27, rose 7% by Jan 31, 2013, fell 7% by Feb. 22, rose 7% by March 13, fell 15% by April 5, rose 5% by April 12 and closed April 15 at $6.46¾ a bu, down 2% from April 12 and down 14% from Nov. 1.

On April 16 one would have had little clue of the broad decline in the markets the day before. Early that Tuesday U.S. stock index and gold futures were higher, crude oil was modestly lower and grain and oilseed futures were mostly higher. The rebound illustrated that the market tends to have a short memory and often quickly returns to fundamental influences as the tug of outside factors fades, at least until the next “big” event, yet unknown but sure to occur.

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