I moved this week’s #onthefarm Twitter interview to Wednesday to accomodate the schedule of my guest, Arlan Suderman. Suderman is a market analyst for Farm Futures magazine. I wanted to give our row crop farmers a break this week (well, really, most of them are harvesting or getting ready for harvest), so I thought I’d try to learn a bit more about the commodities markets. I admit: I know just enough to make myself dangerous in a conversation. But, I can always learn more, and I thought I could ask a few simple questions that some Twitter and blog followers may find useful.
Arlan was gracious with his time (we did this during market hours), and he was patient with my simple questions.
So, I hope you can follow along in the transcript below. I reorganized some of the tweets to match the questions as best I could.
If you have any questions for Arlan or me, tweet us at @ArlanFF101 and @n_web, respectively. I would appreciate any feedback you can give me on how to make these segments better.
Enjoy! Hope to have another #onthefarm for you next week!
n_web: We’ll get going for #onthefarm with @ArlanFF101 in about 15 min. I’m using Tweetchat. Let’s hope it complies again this week!
n_web: Arlan is Market Analyst for Farm Futures, based out of Wichita (I know, I know, another Kansas guy). We’ll hit Mizzou soon!
n_web: He also is a former Extension educator & Certified Crop Advisor who built a business as a risk management consultant for farmers
n_web: I thought we’d give the row crop farmers a break this week and change it up. Let’s try to learn a bit about the markets.
n_web: Once Arlan sends a tweet, we’ll get going. Hope this is enjoyable. DM me a question if you have one for Arlan.
ArlanFF101: Good morning, Nick, and all who are following for this onthefarm chat.
n_web: Hi Arlan, Thanks for joining us, especially during market hours. First question in a sec.
n_web: Q1: Tell me a little about what you do for Farm Futures as a market analyst.
ArlanFF101: I write market analysis for Farm Futures the magazine, FarmFutures.com and daily e-newsletter Farm Futures Daily.
ArlanFF101: It used to mean just studying supply and demand fundamentals and seasonal charts, but it’s much more now.
ArlanFF101: This week’s markets are a good example. Fundamentals didn’t change, but money flow dynamics gave far different results day to day
n_web: Q2: OK, before we start throwing “fundamentals” around, can you give a quick overview of how the markets work?
n_web: I guess what I mean is, how is the crop or livestock traded?
ArlanFF101: The grain futures market is designed to be the purest form of supply & demand driving price that there is.
ArlanFF101: Traders bid for grain or livestock each day in the pit based on what they believe the future value of the commodity will be.
ArlanFF101: They’re traded in standardized futures contracts of 5,000 bushels with a set delivery month for the contract.
n_web: Q3: So, right now, looking at corn and beans, the prices are lower because harvest is near and there’s a big crop expected?
ArlanFF101: Traders are pricing in an expectation/fear of a big increase in yields in USDA’s October 9 crop report, like in 2004.
ArlanFF101: Supplies are always largest at harvest, pressuring prices, but fear/emotions play a major role in driving prices day to day.
ArlanFF101: The focus tends to shift to demand trends once traders have a handle on the size of the crop; usually by mid-October.
n_web: Q4: What are those fears/emotions? Can you elaborate?
ArlanFF101: Traders are like you & I; trying to make a living. They manage massive amts of $$. Their job rides on being right.
ArlanFF101: They fear being wrong; particularly newer traders who haven’t been through volatile markets before. Greed also plays a role.
ArlanFF101: Last fall’s collapse of the financial system provided another example.
ArlanFF101: Ordinary Americans w/ $$ invested in funds demanded cash back from the funds, requiring them to liquidate positions in futures.
n_web: Q5: Was greed at play last year? When we saw $16 beans and $8 corn?
ArlanFF101: Greed was a factor, but fear was also a major factor. End users were afraid that Midwest floods has slashed production.
ArlanFF101: 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.
ArlanFF101: Speculative funds are usually sellers before prices hit their peak. They typically recognize when prices are getting too high.
ArlanFF101: Fund investment of corn, beans Chic & KC wht topped $55 bln in spring ’08, several months before market peaked.
n_web: Q6: What can traders learn from last yr? Is it that newer genetics/agronomics may counter later plant dates that we’re used to?
n_web: Follow up: I mean, this is back-toback yrs that we’ve had late planting, but pretty large crops. Does that signify anything?
ArlanFF101: It’s difficult to draw conclusions from 1 or 2 data years, but new genetics certainly have helped crops deal with adversity.
ArlanFF101: New genetics has given great stability to production agriculture, making traders wary to buy into a weather threat after 2008.
ArlanFF101: 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.
n_web: Q7: How much do you pay attention to what seeds & traits are out there? You mention drought (didn’t show up in the thread though)
ArlanFF101: I follow overall production trends. There’s a difference between what happens on the individual farm and across the Corn Belt.
ArlanFF101: I closely follow how genetics is impacting overall production trends and ability to withstand adversity.
ArlanFF101: We then adjust our forecast models accordingly for anticipating yield results.
n_web: Q8: What production trends are you seeing now?
ArlanFF101: 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 yrs
ArlanFF101: This year will be a great test of genetics. Sunlight is a major limiting factor of yield. The Midwest was quite cloudy this summe
ArlanFF101: If in fact this is a big crop, it will mean that genetics is re-writing the text book on photosynthesis.
n_web: That’s an interesting statement. I’ll have to ask a few of our breeders about that now
ArlanFF101: I should say that corn yield consistency has been excellent. Soybeans have still struggled w/ dryness/adversity late in growth.
n_web: Q9: Back to the 20-yr trend model: when do you forecast national yield avg in corn to hit 200? And 50s in beans?
ArlanFF101: Good question. I haven’t projected out that far. I’m typically looking out 1 to 2 years, which matches market expectations.
ArlanFF101: One of the factors that drives me is the money-flow dynamics of the markets.
n_web: Q10: OK, let’s help a few farmers out today: What the heck is happening with this fall’s market? Can you give any guidance?
ArlanFF101: Analysts point to yields, demand, etc., but prices often follow DOW & crude tick for tick, inverse of the dollar on currency mkts
n_web: Maybe related to my Q is one from @Tykerman1: what has biggest effect on market movement: dollar, oil, or something else?
ArlanFF101: We’ve seen that happen a lot this fall. Seasonal harvest pressure adds to losses as $$ rallies, but falling $$ supports prices.
ArlanFF101: Dollar, equity & energy markets are very intertwined on a daily basis. Dollar is probably most dominant factor this year.
ArlanFF101: However, these markets have taken their turns in which leads on a day to day basis. Dollar currently more dominant.
ArlanFF101: Big focus today is on Federal Reserve meeting, with policy statement coming out as grain markets close at 1:15 CDT.
ArlanFF101: Any change in Fed policy to withdraw stimulus could lead to seasonal correction in equity/energy mkts, pressuring grains.
ArlanFF101: That would likely be accompanied by rise in dollar, but I expect Fed to hold the line yet at this time.
n_web: Q11: If prices follow Dow and crude, is that one reason why some non-ag traders got into the markets in late 07 and 08?
ArlanFF101: Non-ag traders looking 3-5 years out. Fiscal policy argues for cheap dollar leading to inflationary pressure.
ArlanFF101: Commodities provide hedge against inflation; particularly food- and energy-based commodities. Global stocks of each are snug.
n_web: Before Q11: this relates to your prev. answers: Q from @kheikes: what is causing today’s rally?
ArlanFF101: Today is interesting. Grains are divorcing a bit from outside markets.
ArlanFF101: Underlying chart support held when crude pressured prices early. Traders covering short (sold) positions. Chart-driven.
ArlanFF101: Demand is also picking up on price breaks as end users take advantage of cheaper prices.
n_web: Q12: OK, can we look ahead: What are a couple of your predictions for the 2010-11 marketing year?
ArlanFF101: Soybeans are the driver short-term, but corn takes a stronger leadership role in 2010 and 2011 as the global economy heals.
ArlanFF101: Traditionally, wheat is the leader. Domestic stocks need to shrink first. Much of recent rise in global wheat stocks is in China.
ArlanFF101: China will be a major driver of grain demand over the next several years.
ArlanFF101: That’s why we follow China’s economic recovery closely.
n_web: China is still purchasing record amounts of beans, right?
ArlanFF101: China is buying soybeans at nearly twice the pace of last year’s record buying spree.
ArlanFF101: They had a shorter crop due to drought and they also would rather own hard assets vs our shrinking currency.
ArlanFF101: China places high priority on having adequate food supplies. It must avoid social unrest.
ArlanFF101: It will threaten actions against food imports, but it will be very selective in actually doing so. Food stocks are essential.
ArlanFF101: As such, no actions on soybeans until they have enough.
n_web: Q13: What’s your take on the future of ag in the US? Sounds like it may depend on China some . . .?
ArlanFF101: 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.
ArlanFF101: In other words, the final crop size will determine if we have significant upside potential or not. We’re a few weeks from knowing
ArlanFF101: I’m bullish agriculture. We’re in a slump now, but that will turn. The world needs our production capacity.
ArlanFF101: However, we must be smart about it and maintain equity stability on the farm. Keep debt to a minimum. Manage margins.
n_web: Last question: Is Trading Places the best movie to learn about commodities trading? :)
n_web: Do you and your co-analysts say to each other every day: “Looking good, Billy Ray!” “Feelin’ good, Louis!”
ArlanFF101: Trading Places was a great movie. It does give an idea of how the markets work, but it wasn’t totally accurate with view of mkts
ArlanFF101: It provided a humerous look at the trading game, so to speak. That’s for sure.
n_web: I know, it’s just fun to reference for those who don’t know anything about the markets. It’s a starting talking point :)
n_web: Arlan, thanks for joining me today and putting up with a few simple questions. I hope you found it worthwhile.
ArlanFF101: We should mention that the markets are highly regulated already, unlike the picture one gets from the news these days.
ArlanFF101: I’ve greatly enjoyed the Twitter conversation!
n_web: Should have asked: any final parting points?
n_web: Great, glad you could make it. I’ve got some reading to do after this one! We’ll look for your input ahead of the Oct. 9 report.
ArlanFF101: I think we’ve covered enough to make people think. In summary, I’m bullish US agriculture!