Top Market Factors

January 30, 2010 06:00 PM
 
There are plenty of factors that push commodity prices up and down. Strategies that keep your prospects open, such as options or minimum price contracts, will have special appeal this year.

Volatility

All ag advisers agree that market volatility will remain high. "World supplies of grains and oilseeds are tight.

Any perceived or actual supply disruptions could spell big volatility for prices,” says Bryan Doherty, senior market analyst for Stewart-Peterson Group/Top Farmer Intelligence.

This could be good news for farmers, says Dan Basse of AgResource. "There will be multiple chances to sell a crop at a profit.”

"Farmers will be more proactive sellers on price rallies,” Doherty says. "In both of the past two years, after offering significant value, prices collapsed. Trying to outguess the market is proving difficult. Look for many producers to sell value and live with a good price. The government safety net is too far under the market and there is too much risk in doing nothing.”

The dollar
The direction of the U.S. dollar is another factor advisers agree will be important. Analysts are not sure whether recent strengthening will continue—and possibly work against U.S. ag exports—or whether the dollar will languish. "Will the U.S. dollar continue to rally as other world currencies are seen as less ‘reserve-like'?” Basse asks.

The dollar has gained strength because the U.S. economy is recovering more rapidly than many other developed economies and U.S. bond yields are at a five-month high, drawing cash into dollar-based investments.

Speculators are also adjusting positions ahead of the year-end, says author Darrell Jobman, former editor of Futures magazine. "They now have a net long dollar position, so there is less room for further buying and any further advance will meet resistance.”
 
Growth, inflation and interest

Longer-term, analysts worry whether the U.S. and world economies can maintain growth with reduced government stimulus. "China in particular will pull back on its lending pace,” Basse says. "How will this affect world commodity demand?

"How will commodity markets react with rising U.S. and world interest rates? Who is going to secure all the debt issued by public and private sectors? Will U.S. rates rise in a political year?” he asks.

Farm Journal Economist Bob Utterback worries that inflation and the phasing out of government stimulus aid will lead to higher interest rates in the U.S. "It is critical to lock up interest rates at the current low rates for as long as possible and, if not, to consider hedging the 10-year note from the short side to offset interest rate exposure.”

"Banks and lenders will be tighter and more selective with lending practices,” Doherty adds. "Lenders are learning that marketing can make a big difference for the bottom line.

Too much opportunity has been left on the table in the last couple of years. Don't be surprised if lenders require producers to have a strategy or service lined up before they grant approval of a loan.”

Supply and demand

The following are commodity-oriented factors that advisers say they will be watching closely in 2010:
■ Record South American crops
reduce the need for additional U.S. planted acres in 2010, yet there will be 2 million to 3 million acres of Conservation Reserve Program contracts expiring.
■ Energy will continue to be the primary commodity providing direction for most markets, Doherty says. A question for corn is when the Environmental Protection Agency will decide whether to raise ethanol blending rates, Basse adds.
■ Will U.S. meat consumption be able to rebound in a jobless recovery?
■ If El Niño lasts through the summer, it could mean another season of
favorable central U.S. weather. 


You can e-mail Linda H. Smith at lsmith@farmjournal.com.
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