Macro Economy Sways Commodities

November 12, 2013 07:59 PM
Macro Economy Sways Commodities

Account for global events when developing your marketing plan

Farmers enter the micro world when making hard choices about what gets planted where, how much fertilizer to buy and what kind of weed strategies to employ. But when it comes to marketing, the smart ones closely watch macro changes, factoring in everything from the outlook for exchange rates to government policy to global GDP.

"Macro factors are more important than they used to be," says Jim Hilker, ag economist at Michigan State University. "We continue to become more intertwined with the world economy."
Some macro factors, such as exchange rates, have been important for decades. A new kid on the macro block is oil prices. "That’s the big elephant," Hilker says. "Instead of tying ag to food, commodity prices are increasingly tied to oil prices." It’s not just corn. Oil prices impact the outlook for soybeans and cattle.

Top Tips:

Calculate oil prices, exchange rates and interest rates  in your 2014 marketing plan. Develop a long-term strategy and don’t be afraid to price grain one year and even two years out, advises North Dakota’s Frayne Olson. When you see a big price spike, lock in a portion of production for future years.

"Oil price hikes can be paralyzing and disruptive to agriculture," adds Frayne Olson, ag economist at North Dakota State University. "If gas prices go ballistic, consumers change vspending habits, and that has an impact on feed, grain and meat demand. If you’re trying to sell soybeans to China and crude oil hits $140 per barrel, shippers put surcharges on diesel and basis drops."

While hundreds of macro factors impact commodity markets, there are a few you should calculate into your marketing plans. These include interest rates, government policy, exchange rates, global GDP and production growth in other countries.

Developing a strategy that includes these factors is not easy, and even the best minds are frequently fooled by global events, says Pat Westhoff, director, Food and Agricultural Policy Research Institute (FAPRI).

"The increasing impact of macro policies means that producers need to jump on good prices earlier, even if prices are lower than they’d like," Hilker says, explaining that changes in macro events move prices faster and more dramatically than they used to.

Olson says that is partly due to computerized trading, with billions of dollars of commodity investment behavior triggered once certain macro trigger points are hit.

Arguably the most important macro factor is exchange rates. The value of the U.S. dollar is affected by other macro factors, such as interest rates, economic growth and even Federal Reserve Board monetary policy. "The relative strength of the U.S. dollar has a huge impact on exports," Olson says. "It affects our ability to compete in world markets. Today, the dollar is at a discount, making it good for exports."

Besides exchange rates, farmers should monitor interest rates and inflation. If the economy roars back, Olson says inflation could become a major issue and impact everything from the value of farm assets to commodity prices.

With the rebuilding of grain stocks and lower prices, farmers are well served to develop a strategy to use macro shocks to their advantage, Olson says. There will be years when macro shocks create price spikes. These shocks can drive up prices in the year that the event occurs and sometimes for several years.

A powerful example is 2012. December 2013 corn futures peaked at $6.65 Sept. 7, 2012, when near-term prices hit $8.49. That’s more than $2 higher than December 2013 futures in late October. December 2014 corn futures peaked at $6.14 per bushel Sept. 19, 2012, more than $1 higher than this fall.

The upside of macro shocks doesn’t last long; use a macro perspective to help develop a long-term strategy.

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