The Little Known Competition in U.S. Commodity Markets

November 28, 2012 04:17 PM
The Little Known Competition in U.S. Commodity Markets

More to the equation than commodity supply, demand

China, Brazil and Argentina aren’t the only countries that pose a risk to U.S. commodity markets. A multitude of other countries that often fly under the radar can have a huge impact on your bottom line.

"Anything that can be
made from corn can be
made from tapioca."

While Brazil, Russia, India and China are rapidly developing, it goes beyond that, says AgYield’s Jeff Hebble, who spoke at the recent National Agricultural Bankers Conference in Milwaukee, Wis.

Producers need to be mindful of the key crop and livestock sectors in other countries, he says. For example, Pakistan and Bangladesh are small in area but have a combined population of 360 million people (more than the U.S.). Almost 80% to 90% of corn starch produced in Pakistan is used in the textile industry. "Many uses of corn are not so evident," Hebble adds, but are notable on a global scale.

In addition to knowing who raises what, producers need to understand what that means in terms of competition between commodities. Nigeria, Brazil and Thailand produce a significant amount of tapioca. So what? "Anything that can be made from corn can be made from tapioca," Hebble says. "It’s a new player influencing the market."

Another country to keep in mind is India. Last year, it exported more beef than the U.S. thanks to a dairy revolution.

Beyond supply and demand, the developing world impacts producers’ pocketbooks. For instance, Morocco is home to almost 40% of the world’s phosphate supply. The nation is a monarchy dictatorship; if there is any tension between the U.S. and Morocco, fertilizer prices would likely go up.

When it comes to ethanol, sugar competes with corn. Sugar prices have declined from their high by 30%. If Brazil’s production increases as a result, the U.S. could import more from Brazil, Hebble says.

"Everyone talks about black swans," he notes. "I talk about the flock of seagulls coming from different directions. Such events can cause a limit move down on corn, or 40¢. That’s $75 per acre." How do you handle that? In Hebble’s view, the key to protecting capital is utilizing crop insurance, futures, options and cash sales in an integrated platform to manage risk. "We’re past the time of trying to pick prices," he says.

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