Fundamentals Take a Back Seat

January 12, 2010 06:00 PM


Indiana grain producer Todd Heller sits down at his computer every morning to check the grain markets. But during the past year, he has also begun watching the dollar index and crude oil for a reading on grain movement.

It makes Heller wonder: If he can get a clearer sense of where grain prices are headed by watching the dollar index, have agricultural markets moved entirely away from basic supply-and-demand fundamentals?

"In this day and age, it's a valid point that farmers now have to consider the outside markets when making decisions,” says Mike Hogan of Stewart-Peterson, a marketing strategies and risk management firm.

As far as the dollar index is concerned, it does have weight and impact on grain markets when it is at the extreme, Hogan says. The theory is that a strong dollar makes U.S. commodities more expensive in world markets, and vice versa.

So when the dollar index was at the 120 mark, grain prices were in the gutter, Hogan says. Now that the dollar is inverse, grain prices are improving. But if the dollar ever moves back to equilibrium, it may not impact grains much, he says.

There is no doubt that grains and the dollar are correlated, says Alan Brugler, president of Brugler Marketing & Management. But he believes that some of the movement in the grain markets is an exagger-ated response to the dollar.

"We have to continue to follow the dollar in the short run because that's the emphasis right now,” Brugler says. "But I will guarantee you that the correlation will break down.”

Funds a Problem. Now that the dollar has moved back down, it should make grains cheaper in the export market, says Bill Biedermann, senior vice president of Allendale Inc. But the downside is that the funds also have run the market up so disproportionately that grain merchants can't sell wheat on the export market—they have to give it away.

Biedermann believes the funds are the real root of Heller's question. "There is an imbalance between the ability of the funds to put on positions that are exempt from any limitation while they are still limiting the amount of grain that a Cargill can deliver,” he says.

Until we get back to where the commercial industry is balancing speculative interests, producers can expect an imbalanced market that does things no one can explain, he adds.

When just one large fund, such as GSCI, controls more than 50% of the index fund money and is hugely invested in grains, it's easy to figure why the market is moving the way it is, says Richard Brock, president of Brock Associates, a commodity marketing consulting firm.

As the funds invest in many types of commodities each year and the value of one commodity, such as crude oil, goes up, they have to buy more of another commodity (think grain) to keep the funds balanced, Brock says. When crude drops down, for example, they might sell more grain.

"This is what is putting the feed and livestock industry out of business,” Brock adds. "Until we get some balance in here, we are all on a freight train heading into a brick wall.”

Marketing the Volatility. There is no question that the funds have made a major impact on how grains are traded, says Mark Gold, managing partner with Top Third Ag Marketing. But marketing is all about taking advantage of the next opportunity and being in a position to take advantage of that opportunity, he says.

"Thank goodness for the funds,” Gold says. "They gave us an opportunity on the up when they blew out of the market last year, and they gave us an opportunity on the down.

"The people who were in a position to take advantage of that did pretty well,” he adds.

Tools for Technical Marketers
Good tools are critical to catching market signals if you're a technical trader. At the Farm Journal Media Marketing Rally in Chicago, several analysts shared their favorite marketing tools for knowing when to make a move.

"I like to look at timing of the market,” says Sue Martin, president and owner of Ag & Investment Services Inc. "I have indicators that earmark times of the year to which I should pay attention. After that, I watch for trends following various moving averages and how the market is responding to them.”

Mike Florez of Florez Trading also uses timing cycles but likes to incorporate various wave counts. "It's easy to look at wave counts,” he explains. "If the market has gone up 50¢ over a 10-day period and then pulls back, it's very likely you are going to get a similar move on the next uptrend.”

Track how long a period of time the market has gone up and to what degree it went up, Florez says. "You'll see symmetry in the market,” he adds.

Brian Basting of Advance Trading blends both fundamentals and technicals. "The underlying strength of our analysis is supply and demand, but we like to use the technicals for a stop-or-go sign,” he says. "When you reach extreme highs or lows is when you put more emphasis on technical signs.”

A simple tool to watch is a 50-day moving average, says Gregg Hunt, a senior trader with MF Global. "Watch that and it will keep you out of trouble,” he says.

Top Producer, January 2010

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