An Evolution In Agricultural Commodity Markets: Sometimes At Light Speed

     When I first start out planting corn in the spring, it is very common for me to get off the tractor and dig up the corn seed to see how deep I have it planted.  Typically, the first few rounds have me getting off the planter and crawling over the ground behind the planter looking for seed.  If you saw me from a distance, it would look like I was praying.

Even though I think prayer is very important, usually have one overriding feeling at that time.  I always think it is such a long journey for this small corn seed to make until I roll through with combine in the fall.  That 6 or 7 month journey to harvest time always seem so far away as the corn drops down the seed tube into the smooth trench formed by my double disc openers.  Needless to say, that time has come; my combine has been rolling through my corn over the last few days.  At least in this part of southwestern Ontario, it is a corn harvest made in heaven.

I say that because we have $7 cash corn prices at harvest time.  I also say that because in my part of southwestern Ontario we have record yields.  The market surely has been interesting this year, setting precedent after precedent and reaching record levels in early September.  We have also seen prices fall especially in the soybean market much lower than many of us had ever expected.  The question is what happens now and how will markets react in the next few weeks after we put the North American harvest to bed?

If I knew that I’d be sitting on the beach somewhere with an iPhone.  However, I’m busy driving a combine through my fields, so much mean I’m invested in agricultural commodities as well as being the eternal optimist.  Trying to figure out these agricultural commodity markets is a continuing challenge.  Yes, I have said many times these are not my father’s markets.  The more and more I think about it, they might not even be mine.

I say that because of the constantly confusing world of noncommercial speculative demand in our agricultural commodity world.  We all know that soybeans had lost about $3 per bushel off the September highs we saw earlier.  My DTN colleague Darin Newsom wrote an excellent column about that this past week, comparing the free fall in soybeans to Felix Baumgartner’s plunge last week from 24 miles up in the atmosphere.  Increasingly though, I am thinking about the market itself, how it works and how as farmers we can capture marketing opportunities while being wary of some of the pitfalls within our agricultural commodity world.

Case in point is the world that some people call high frequency trading.  For instance, as farmers we look at the markets every day for our corn and soybeans hoping to capture profits in a consistent manner.  I always say daily market intelligence is key to keeping abreast of the market environment.  What I mean by this is to check prices daily, with grain standing orders in place to capture sudden price movements.  However, that is not high frequency trading.  In high frequency trading, computer algorithms trade in Nano second intervals trying to capture 100th of a penny in a typical trade.  It adds tremendous liquidity to our agricultural markets.  However, when the buy orders dry up sometimes the vacuums that are created are extraordinary and market volatility is extreme.  Some may even argue that’s what happened to soybeans since September.

In many ways, it’s like we are pawns in the game.  Key is to capture marketing opportunities while the big players in the market employ computer algorithms trading at high frequencies as close to the exchange as they can get.  It’s almost like extreme capitalism meets the farm and as long as everything works, that’s okay.  The hard part is getting around on how the world has changed.

Case in point is how fresh news affects our agricultural commodity markets.  I always think it’s extremely interesting when I listen to, analysts and they say there was no “fresh news” so the market drifted lower today.  Then, on some ordinary Thursday there is some fresh news about China back in the market, which moved prices.  Even more extraordinary, is when there is an unexpected Tuesday, which slaps the market with fresh news moving prices violently.  In essence, this is where the high-frequency trader affects everybody as algorithm computer trades are made in Nano seconds, which makes you dizzy.  I’ve been there a few times.

Yes, you’ve heard me say this is not your father’s market.  However, it was really brought home to me last week when my niece who is doing her PhD in Statistics questioned me about the options trade in agricultural commodity markets.  I was surprised she was questioning me because we had never talked about that before. However, she told me she knew about some of the high-end math that went into those computer algorithms.  I was astonished.

With that I continue to measure and study our agricultural markets.  Yes, it’s all about the agricultural economics, but it is so much more.  You might say it’s an evolution, a continuing agricultural commodity market evolution.  It continues to change sometimes at light speed.