Robert J. Shiller, winner of the Nobel Prize in economics, famously declared, “There is no way to predict the future.” He made that statement in cautioning investors in stocks against believing that the current business cycle is different from the past, while pointing out that people are much too eager to believe that the present differs from what occurred before. One of the main reasons that investors think that it is possible to disregard prior experience while relying on the superiority of present knowledge has as much to do with grain-based foods and other crop-related businesses as it affects trading strategies in securities. That supposition stems from modern communications offering access to information and data that were difficult, even impossible, to find in the past.
Many recent market-related events have shown that no matter how perfect information resources may have become and regardless of how large and efficient data bases are, the task of forecasting prices, much less any part of governing supply-demand equations, is nigh on to impossible. The devastating impact of drought on the hard red winter wheat crop in America’s southern Plains states comprises an unpredicted occurrence in the same way that no one expected the Russia-Ukraine crisis to be translated into a possible limit on Black Sea wheat exports.
While weather and international turmoil lead the list of surprises that few observers forecast, it is important in this context to note that both futures and cash grain markets have provided adequate protection for market participants following a cautious course in hedging. Indeed, some commentators consider that futures markets have gotten ahead of the actual reality of still large global supplies of wheat and corn. Instead of adhering to the frequently bullish interpretations of global supply-demand, this questioning viewpoint relies in the case of wheat on high U.S. prices sharply curtailing foreign demand and shifting livestock feeders away from wheat. Hardly anything underscores the surprises in the current situation better than the expanded flow of Canadian wheat to U.S. mills. Canadian wheat imports had climbed to new record totals in recent seasons. The prospect for this year outruns those.
There’s hardly a better affirmation of Professor Shiller’s warning than what two major international trading companies revealed about their operations in a recent quarter where miscalculations led to large losses. While these were certainly not the first losses that major international traders have sustained, including instances of trading losses forcing companies to exit the grain business, they were sizable enough and unique enough to cause a shock. One of these losses did not occur in grain, and was explained as follows: “Earnings were trimmed by a trading loss related to an unprecedented price spike in U.S. power markets.” Also contributing to this company’s setback were non-trading developments focused on grain, such as China’s rejection of corn imports and rail service disruptions. Yet another company said, “Results in the quarter were primarily impacted by losses in our grain trading.” It further noted, “Our commercial and risk management strategies anticipated lower grain prices.” Instead, prices rose, pressuring margins.
No one may say that utilizing of present-day information resources would have prevented either of these problems. Yet, it is happenings like these that have been part of industry history for generations that one might hope would be alleviated or even prevented. Such systems are not only designed to inform when danger looms but to provide a point for taking action to change both position and strategy commitments that accommodate or avoid these risks. In a time when companies are putting together systems that identify future risks related to weather, crop prospects, national instability and conditions affecting consumption, these new approaches could help all parts of the industry. That these resources and these systems are available now represents a huge plus for businesses like grain-based foods. No industry should benefit more than grain from this new age of electronic communication and data sourcing.