I read a climate research article that was tracking solar activity such as sun spots. The conclusion was that, on average, the North American hemisphere will cool by about 9 C. Another report suggests we could see the continued spread of the U.S. drought, north into the Canadian Prairies.
How reliable are the weather models that are predicting these cycles based? How do you factor in the impact that intensive farming with continuous cropping and irrigation can have on these models?
Another recent article talked about new varietal development in soybeans in that will increase acreage. Some are predicting that as many as two million acres of soybeans will be seeded within the next few years.
How does this fit in with the weather trends? Do those projections make growing soybeans a viable option?
Back to the farm
How do you correlate information like this back to marketing your grain on your farm?
It goes back to your yearly review and the long-range planning that you do (or should be doing)!
Start by looking at what has been working for you.
What are the most profitable crops for you to grow? Does your profitability come from the quality you grow or from the volume you produce? This is a key distinction. If the crops you are growing are not profitable unless you get the highest quality possible, that is certainly a greater risk to your farm than if your profitability is derived mainly from volume, and quality is an added bonus to your bottom line.
Now, try to determine how theories of cooler temperatures or possible drought or anything else could impact your farm’s profitability.
These and many other reports that come out on a daily basis have the potential to profoundly impact agriculture Are they for real? That is what you need to try to determine.
Finding the truth
Deciding if the predictions in the articles you read are factual is very similar to determining when and if you should be selling or pre-pricing your grains.
What are the markets telling you? Is this information reliable? What are the buyers and sellers doing and why? What’s happening that could impact prices in the future?
Let’s look at this a little more in depth.
What can we learn by looking into the futures markets and how they are trading?
Let’s start with some terminology definitions that may help to clarify some things.
Often you will hear references to commercial or non-commercial activity in the futures markets. What is that? Commercial activity refers to the legitimate buying and selling of that specific grain through a futures contract by someone who owns the grain or someone who needs the grain for an end purpose.
Non-commercial activity refers to all others who take on a futures contract strictly with the intent of making a profit without ever taking ownership of the grain. They’ll buy in and out of the contract before the expiry date with the hope of making a profit; they’re usually in the market over a short time period — 30 to 90 days.
This is where a lot of money can come into the grain futures markets through trading funds, mutual funds or companies with cash looking for a quick profit opportunity.
This is also what can create a lot of market volatility, which can be good and bad and also frustrating from a farmer’s perspective.
Say the Statistics Canada report shows canola stocks down, which results in fewer tonnes to sell to meet market demand.
Non-commercial speculators see this as an opportunity to buy futures contracts now and sell them later for a profit as they expect markets will go up because of the lower stocks. The futures contract for canola experiences a large volume of non-commercial activity as these speculators position themselves to make a profit from this potential rally.
You also believe prices will go up so you don’t sell any more canola for now, you wait for higher prices.
Futures rally nicely, but just before you decide to sell they take a hard tumble, Why did this happen? Charts showed that the markets could go up another $10 to $20 per tonne. What’s up?
The most likely explanation is that one of those non-commercial speculators decided to sell all of their contracts now, while there were interested buyers. They might take their profits and run rather than wait out the markets for another $10 or $20 per tonne, and taking the risk that they may not be able to sell their contracts at those higher values.
Once the other non-commercial speculators catch wind of the situation they will most likely try to sell out their contracts as well. All of a sudden you have multiple sellers offering contracts for sale, so buyers start lowering their buying prices, which starts the slide in the futures values.
Quite often when this happens futures values will fall dramatically. Some traders will come out making a profit and some will experience a loss, but the farmer who didn’t understand these market dynamics and wasn’t prepared most likely missed out on a great pricing opportunity that may not come back again. †