When talking about markets you always hear the terms technicals and fundamentals.
“Technicals” refers primarily to the historical and present day charting information for a commodity. This includes examining all of the formations, trend lines, etc., to determine where futures prices are going.
“Fundamentals” encompasses other aspects that can influence markets — such as politics, currencies, supply and demand and weather.
Those who trade and speculate in the markets tend to have a preference for either technicals or fundamentals. I tend to use fundamentals first to get a broader understanding of what is happening in the markets, and then apply the technicals for a more detailed picture of how the markets are reacting and what that is telling us.
Let’s look at some of the components of fundamentals, starting with supply and demand.
Creating a supply and demand report is a complex process of trying to predict future prices based on historical information and production estimates, use estimates and calculations of how much will be left over for the next year. Regardless of how accurate or inaccurate the numbers may be, once they are released they become “the numbers” that the markets will use to trade until new numbers are generated.
If all producing nations would openly share their information, and if buyers would divulge how their buying intentions, you might stand a chance of coming up with an accurate S&D analysis for world grains. Until that time comes we will continue to rely on educated guesses based on years of data, satellite imagery and good old gut feelings.
Production estimates are a major part of estimating S&Ds. Estimating world grain production is greatly impaired by many variables. Thank goodness for years of data that allow analysts to use historical averaging as a baseline. With the addition of satellite imagery to help analysts estimate crop growth and health, production estimates are quite accurate, until Mother Nature enters into the game!
Politics is another component of fundamental analysis that can influence markets. This was evident when Indian tariffs changed the dynamics of global pulse crop markets.
Trade is disrupted when sanctions or embargoes are placed on countries. In today’s world, grains are traded in or out of almost every country so sanctions or embargoes in any one country can influence markets around the world. This will no doubt impact prices — either good or bad depending on the W5 (who, what, where, when, why) of the situation.
Renegotiating existing or negotiating new trade deals can have a significant influence on market access for products into a country. Deals can eliminate tariffs against products or give one or more suppliers preferential access over others. These changes will likely impact prices in one or more, or all, of the countries influenced by the trade deal.
The new Trans-Pacific Partnership (TPP) is a prime example. Here in Canada some industry sectors claim it will be beneficial while others claim it will be detrimental to their business.
What will happen with NAFTA? It could be going the way of the Dodo bird and it could all depend on the Tweeting of another Dodo!
Currencies can have a big impact on supply and demand projections, especially if the currency of a major buying nation drops dramatically. This can make it impossible for them to buy as much as they did previously, meaning world supplies and end stocks will increase and prices will likely drop, which all have ripple effects on markets.
Weather is a major influencer when it comes to a fundamental analysis of world grain markets. As the weather changes, so can world grain S&D projections. This is what puts volatility in futures markets, keeping buyers and sellers and speculators unsure of what might be out there for sale and at what price.
Fundamental analysis has many aspects, none of which are cut and dried or black and white. In the end it comes down to an educated guess — utilizing a mix of data, analytics and gut.