Ag Fundamentals: Old and New; Understanding the Fundamentals of Ag Markets Is No Longer as Simple as Following the Weather and Knowing What USDA Reports to Watch. Speculative Money Flows, Non-U.S. Demand and Energy Fundamentals Often Trump the More Traditional Supply and Demand Measures

Article excerpt

We are entering a new world for agriculture fundamentals. Weather and governmental reports on inventory, planting intentions and other traditional measures of supply and demand used to be the main drivers for agricultural markets, and while they're still important factors, several new fundamentals have become relevant. If traders want to stay profitable in this new world, they need to pay attention to the shifting dynamics to harvest bigger profits.

The old fundamentals of supply and demand are measured by U.S.Department of Agriculture (USDA) reports (see "Supply and demand," right). Many analysts give the greatest weight to the stocks-to-use ratio for grain markets, which is calculated by dividing ending stocks for the year by total use. The stocks-to-use ratios a picture of how tight supplies are, which is the primary measure used to project prices (see "Little left for rainy day," right).


This table shows supply and demand for wheat, corn and soybeans from
2004-2007 and Allendale's estimates for 2008. As you can see, the
amount of grain leftover (carryout)for reserve has declined overall
for most grains.

                      2004    2005    2006    2007   2008 est.

Corn   Total supply  12,776  13,237  12,517  14,393   13,595
       Total Use     10,662  11,270  11,211  12,955   13,113
       Carryout       2,114   1,967   1,303   1,438      482

Wheat  Total supply  2,776   2,727   2,505   2,613     2,571
       Total Use     2,235   2,156   2,049   2,371     2,235
       Carryout       541     571     456     242       336

Beans  Total supply  3,242   3,322   3,647   3,165     3,260
       Total Use     2,986   2,873   3,072   3,025     2,915
       Carryout       256     449     575     140       345

Source: Allendale Inc.

However, with more speculative money flowing into agricultural futures markets, supply and demand fundamentals are fading into the background. "If invertors simply look at old school supply/demand fundamentals, they are likely going to have a very difficult time making sense of agricultural commodity markets," says commodities analyst Shawn Hackett. "Prices are being set more by the investment monies than ever before," he adds.

Bill Biedermann, senior vice president at Allendale, says "Today, because of the imbalance of the money, the supply and demand in grain inventory is not driving [the agmarket]. [Rather], it's the supply and demand of money chasing contracts." (For Biedermann's article on grain fundamentals, see page 48.)

A new kind of investor is also putting the old fundamentals on the back burner. Elaine Kub, commodity market analyst for DTN, says that with more speculative interest in the market, "the idea of inflation or the idea of increased demand from Asia may be enough to encourage buying by some event-driven funds, regardless of demonstrated supply and demand, or regardless of supply issues at all." As far as seasonal fundamentals, she says, "The commercial traders who are experienced with seasonal tendencies don't have as much market influence in the face of all the new speculative money as they used to." Biedermann expects speculative money to continue to pour into the agricultural markets until July or August unless there's a fiscal collapse and a pull out of the market.

Some analysts claim that the speculative money is causing extreme moves and high volatility. Currently, the agricultural market is experiencing weekly ranges equivalent to yearly ranges, according to Biedermann. "We're seeing major, major firms pull their contracting capabilities. They're not offering these contracts anymore because they don't want to be caught in this futures volatility. Right now, the majority of the grain industry has yanked all of its cash contracts. If you're a farmer, and you want to take advantage of today's high price of corn for fall delivery, you can't even sell it. No one will buy it. …