On this week of celebrating our Declaration of Independence from England, I reflected on the fundamental changes that the GLOBAL nature of commerce have now caused. We are now quite Interdependent with other nations in virtually every aspect of our every day lives. Not only are we interdependent with other countries but the demand from emerging nations for raw commodities is drastically changing the dynamics of established interdependencies between commodities. More than ever, you can’t invest in any market with only a narrow focus – investors must take into account the greater picture and trade accordingly.
VARIABLES IN GRAIN PRICING
One major factor that has affected the price of seemingly everything is the falling US Dollar. The Dollar Index had rallied to roughly a value of 120 from 2001 – 2002. Since then, the Dollar Index has fallen 40% to 72.50.
(Dollar Index, Monthly Chart)
Corn prices during the 2001-02 period traded in a very narrow range from between $1.85 to $2.30 per bushel. Since then, prices have rallied to about $7.50 per bushel (over a 350% increase in price). Comparing the relationship of the dollar and corn price, a trader might conclude that for every 1% move in the Dollar Index, corn would move 8.75%.
FERTILIZER PRICES
A second major variable affecting grain prices, in general, is the price of fertilizer. Fertilizer costs have risen dramatically over the last couple of years because of the increase in the price of raw materials and transportation. Major components in fertilizer include urea, potassium, and phosphorous. The World Bank reported on June 11th that urea prices have increased 66%, potassium chloride by 123% and phosphate fertilizer by 145% in the past six months. This is partly attributable to the increased price of energy which further raises fertilizer production costs.
The price of fertilizer directly affects the decision-making process when farmers are choosing what to plant. Generally speaking, higher fertilizer costs often push farmers to decide to plant soybeans versus corn.
ENERGY PRICES
Energy prices not only affect the cost of fertilizer, but it also affects the price of fuel needed to power all the farm equipment, which is necessary in both planting and harvesting. While consumers may be complaining about the price of gasoline required to get around town, imagine fueling up a big tractor and spending hours in the field, seeding…and burning fuel. Farmers must also consider the cost of transportation – getting the grain to its ultimate destination. The U.S. is a big grain exporter and a lot of our grain ends up on ships heading to places like China (a big buyer of soybeans). As the cost of shipping increases, our grain customers are showing a tendency to buy from producers who might be geographically closer, in order to supply the same grain at a reduced price through fuel savings.
(Heating Oil, a proxy for Diesel – monthly chart)
COMPETITION
As shipping costs become an increasingly important variable in determining where to purchase ANYTHING, industry must consider the crop supplies in competing nations such as Argentina, Brazil, Australia, China, etc. When Australia was faced with drought-stricken wheat crops in successive years, wheat prices skyrocketed since there just wasn’t enough available supply from competing countries to fill the gap. Since then, a vast increase in planted acreage, plus improved weather, now point to a very healthy global wheat crop. If that were the only consideration, that would imply lower wheat prices (which has taken place to an extent). However traders have to consider the competition from rival crops. For example, wheat can be used as a livestock feed grain, but it must compete with corn and soybeans. As both corn and soybean prices have seen historic price gains, they will lend strength to a wheat market that otherwise would be under severe pricing pressure from healthy available supplies.
(Weekly price chart of wheat – soft red winter)
MARKET OUTLOOK
In general, my market outlook has not changed. Despite the rather bearish Acreage and Crop Condition reports (for corn) I remain very bullish corn, in part, because of the continued weak dollar, continued high energy prices and the late plantings combined with flooded areas in the heartland. My last trade suggestion (Dec 7.00 vs 8.50 (2) call ratio spread) now seems to have aimed TOO LOW and for a while, caused some margin issues for undercapitalized traders…but with December Corn trading over 7.50, a modified trade would be promising.
I’m also interested in establishing a larger bearish position in wheat – in combination with bullish soybean positions.
Contact me if you are interested in going over strategies to capitalize on these or other markets. I am currently offering a free CD-ROM which highlights historical trading strategies on the grain markets. Email me your contact information and best time to reach you at: Francisco.ramirez@archerfinancials.com or call 877-377-7920 between 9 AM – 2 PM CST.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.
Francisco “Cisco” Ramirez
Archer Financial Services
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1600A - Board of Trade
Chicago, IL 60604
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