By Bryen Deutsch, Portfolio Manager, IASG
Posted January 16th, 2013
One of the adages in the grain pits at the Chicago Board of Trade states “the best cure for high prices is high prices; the best cure for low prices is low prices.” Simple economic theory makes this saying understandable. When grain prices run to extreme highs, demand often softens as end users such as hog and cattle producers find their input costs too great to churn a profit. Rationing takes place as buyers tend to draw on existing stockpiles. Furthermore, farmers are motivated to plant grain and subsequent crops increase dramatically. The reaction by end users and producers ultimately creates a scenario that takes world grain supply and demand balance sheets back to the mean. Likewise, the inverse occurs when grain prices are low and grain inventories are high. End users will seek expansion and producers will cut back their production or find alternative crops eventually drawing supply lower and prices higher.
The ramifications of the 2012 drought will be felt for years to come. Between June and August of last year, the price of corn increased 35% and soybean prices jumped 26% in reaction to the extreme heat and dryness in the key growing areas of the United States. Between August and the end of 2012, corn prices gave back half of the summer rally and soybean prices eroded back to the same levels they started from. What happened? Did the drought never happen? Did it suddenly rain? No. The 2012 drought was very real and is now still ongoing into 2013. Moisture levels in the US are posing a challenge to the current growing winter wheat crop and there are concerns for the spring plantings of soybeans and corn.
To make matters more confusing, grain traders must think on a global scale now. The United States is quickly losing their status as the world’s largest producer. For example, Brazil is set to surpass the US as the world’s largest producer of soybeans. Ten years ago, the US produced 65 million tons of soybeans as opposed to Brazil 50 million tons. When Brazil harvests their crop this spring, they are expected to surpass and permanently continue to out produce the US. The shifts in global grain production in light of the tight supply situation are bound to create massive fluctuations in pricing. During the past summer, soybean futures for delivery in November were at times between two and four dollars higher than subsequent contract months. Option premiums swelled to levels never seen before due to the uncertainty. Additionally, the economic health of China and Europe played an intricate role in pricing. Economic hiccups in Asia and the European debt crisis contributed to the volatility.
The January 11, 2013 USDA grain report offered some insight as to what traders can expect from grain prices in the next year. Final numbers for the 2012 crop were revised upward and the global stocks numbers were lowered slightly reflecting an expected increase in demand. Eyes will now be focused on the remainder of the South American growing season, the planting intentions in the US for 2013, and the value of the US dollar and its impact on export business. The world is one global growing season away from either a return to normal supply or a crisis situation. With such uncertainty, there is bound to be continued and possibly increased volatility.
Many of the CTA programs in IASG’s database composed of grains had an exceptional year trading these markets. Numerous managers caught the bull run that started in January and lasted through August and were able to exit with the majority of their gains before prices collapsed during the fall harvest. Commodity Trading Advisors should continue to capitalize on the extreme price fluctuations going forward, however there is no guarantee they will profit and steering these markets will prove challenging. With so much information to consider, it makes good sense as an investor looking to participate in the opportunities in the agricultural sector to rely upon a professional who has the expertise to navigate these markets. IASG has a great selection of Commodity Trading Advisors utilizing a variety of strategies that specialize in grains and agriculture. From the middle of IASG’s homepage, you can click under “Browse Programs” the Grains link. From there, you can narrow your search based among selections such as investment size, AUM, desired strategy, and drawdowns. Another method of finding CTAs specifically trading agriculture based commodities is to visit the IASG Agricultural Trader Index.
Adding an agricultural program to your portfolio can be a great way to diversify your investment. If you would like some assistance navigating IASG’s website or would like to discuss some Commodity Trading Advisors to add to your portfolio, please feel free to contact us. For questions regarding this article, a specific CTA or Managed Futures in general, please feel free to contact me by phone (410) 713-4830 or email me.