Series of Grain-Related Tweets

Arlan Suderman, in an online chat through Twitter, is explaining agricultural futures:

Good morning, Nick, and all who are following for this onthefarm chat

I write market analysis for Farm Futures the magazine, FarmFutures.com and daily e-newsletter Farm Futures Daily. 

It used to mean just studying supply and demand fundamentals and seasonal charts, but it's much more now.

This week's markets are a good example. Fundamentals didn't change, but money flow dynamics gave far different results day to day

The grain futures market is designed to be the purest form of supply & demand driving price that there is.

Traders bid for grain or livestock each day in the pit based on what they believe the future value of the commodity will be.

They're traded in standardized futures contracts of 5,000 bushels with a set delivery month for the contract.

Traders are pricing in an expectation/fear of a big increase in yields in USDA's October 9 crop report, like in 2004

Supplies are always largest at harvest, pressuring prices, but fear/emotions play a major role in driving prices day to day.

The focus tends to shift to demand trends once traders have a handle on the size of the crop; usually by mid-October.

Traders are like you & I; trying to make a living. They manage massive amts of $$. Their job rides on being right.

They fear being wrong; particularly newer traders who haven't been through volatile markets before. Greed also plays a role.

Last fall's collapse of the financial system provided another example.

Ordinary Americans w/ $$ invested in funds demanded cash back from the funds, requiring them to liquidate positions in futures.

Greed was a factor, but fear was also a major factor. End users were afraid that Midwest floods has slashed production.

End users are usually slow to panic, but they'll provide the final push in a bull market fearful they won't have enough grain.

Speculative funds are usually sellers before prices hit their peak. They typically recognize when prices are getting too high.


Fund investment of corn, beans Chic & KC wht topped $55 bln in spring '08, several months before market peaked. 


It's difficult to draw conclusions from 1 or 2 data years, but new genetics certainly have helped crops deal with adversity. 


New genetics has given great stability to production agriculture, making traders wary to buy into a weather threat after 2008. 


We haven't had a widespread drought since 1988. Hopefully drought tolerance will be well est. before we do again in genetics.


I think it says a great deal that demand will grow by nearly 1 bln bu. this year and we still have plenty of corn to meet it. 


I follow overall production trends. There's a difference between what happens on the individual farm and across the Corn Belt. 


I closely follow how genetics is impacting overall production trends and ability to withstand adversity.


We then adjust our forecast models accordingly for anticipating yield results. 


Great consistency of production. I use a 20-year trend yield. We've varied from that trend by more than a few bu. 2x in recnt yr


This year will be a great test of genetics. Sunlight is a major limiting factor of yield. The Midwest was quite cloudy this summer


If in fact this is a big crop, it will mean that genetics is re-writing the text book on photosynthesis. 


I should say that corn yield consistency has been excellent. Soybeans have still struggled w/ dryness/adversity late in growth. 


One of the factors that drives me is the money-flow dynamics of the markets. 


Analysts point to yields, demand, etc., but prices often follow DOW & crude tick for tick, inverse of the dollar on currency mkts 


We've seen that happen a lot this fall. Seasonal harvest pressure adds to losses as $$ rallies, but falling $$ supports prices. 


Dollar, equity & energy markets are very intertwined on a daily basis. Dollar is probably most dominant factor this year. 


However, these markets have taken their turns in which leads on a day to day basis. Dollar currently more dominant. 


Big focus today is on Federal Reserve meeting, with policy statement coming out as grain markets close at 1:15 CDT. 


Any change in Fed policy to withdraw stimulus could lead to seasonal correction in equity/energy mkts, pressuring grains. 


That would likely be accompanied by rise in dollar, but I expect Fed to hold the line yet at this time.


Non-ag traders looking 3-5 years out. Fiscal policy argues for cheap dollar leading to inflationary pressure.


Commodities provide hedge against inflation; particularly food- and energy-based commodities. Global stocks of each are snug.


Today is interesting. Grains are divorcing a bit from outside markets.


Underlying chart support held when crude pressured prices early. Traders covering short (sold) positions. Chart-driven. 


Demand is also picking up on price breaks as end users take advantage of cheaper prices. 


Soybeans are the driver short-term, but corn takes a stronger leadership role in 2010 and 2011 as the global economy heals.


Traditionally, wheat is the leader. Domestic stocks need to shrink first. Much of recent rise in global wheat stocks is in China. 


China will be a major driver of grain demand over the next several years. 


That's why we follow China's economic recovery closely. China is buying soybeans at nearly twice the pace of last year's record buying spree.


They had a shorter crop due to drought and they also would rather own hard assets vs our shrinking currency.


China places high priority on having adequate food supplies. It must avoid social unrest. 


It will threaten actions against food imports, but it will be very selective in actually doing so. Food stocks are essential. As such, no actions on soybeans until they have enough.



Demand is so strong that we must have a big bean crop this year. We'll find out Oct. 9 if we do or not. Rationing needed if not.


In other words, the final crop size will determine if we have significant upside potential or not. We're a few weeks from knowing


I'm bullish agriculture. We're in a slump now, but that will turn. The world needs our production capacity.


However, we must be smart about it and maintain equity stability on the farm. Keep debt to a minimum. Manage margins. 


We should mention that the markets are highly regulated already, unlike the picture one gets from the news these days. 


I think we've covered enough to make people think. In summary, I'm bullish US agriculture!