Sunderman: Understand driving forces of markets

Farm Forum

Understanding the personality of the market and seeing what is driving prices on a day-to-day basis is important for ag producers in this period of erratic trade. Weather concerns across the Corn Belt have yielded all sorts of fluctuations in what yields for corn and soybeans will be, which in turn has pushed the market up and down.

Arlan Sunderman, senior market analyst for Water Street Solution of Illinois, shared his thoughts on a “A Turning Point for U.S. Agriculture” at Dakotafest last week, sponsored by the South Dakota Corn Growers Association.

“Sometimes it’s like fitting a square peg in a round hole,” Sunderman said when discussing what is happening in the markets. “Many farmers have an optimistic attitude and will hang on through this volatility. Those who weather the emotions of the market may be a better fit for the marketing of grains as they may raise the profitability.”

In understanding what moves the markets, Sunderman shared a bit of history. The major funds got started in the commodity markets 8 years ago, whether that was good or bad. The net ownership was $10 billion at that time. Late last summer it topped $68 billion for the corn, beans and wheat market. Sunderman noted that the latest Chicago Future Trade Contract data from a week ago (Aug. 20) showed funds at $16 billion.

Decreasing values in crops will cause the funds to withdraw from market, he predicted. “It’s not a matter if fundamentals are bullish or bearish, we need to know this is a sell opportunity,” he said.

He continued by explaining that there are two funds groups: hedge and index.

The index fund includes cash money, investments, 401k, those not looking for risky situations. It is a diversified fund. Movement is very slow in and slow out. It is known in advance what they will do; for example, in January funds will decrease to 6.7 to 6.3. Each month there will be a fresh flow of money, to do some buying and selling to that end.

Hedge funds are for those who want to be aggressive and chase the market. These funds follow the latest trend, in a day or week, with the philosophy that “trend is my friend.” Once the trend is established, the fund does not care what the fundamental value of wheat, gold or oil ends up at. Sometimes that means taking the market to the bottom as long as the trend is making money.

In the supply analysis, price justifies going either above or below. The hedge funds can drive it further down by catching the top of the market selling and selling more to drive it down. Reports from USDA can have a huge impact on what is happening with the hedge funds.

Sunderman asked, “Who owns the greatest amount of the U.S. debt?” and answered his question by saying the U.S. Treasury Department. “It used to be China. Now we now print money to buy our debt, at the rate of $85 million per month. There is still a lot who are afraid of what the economy is going to do.” He counseled producers to hold on to money, major hard assets and food-based commodities that contribute to the equity markets, as fears of instability in Europe continue.

“Don’t think Europe has hit bottom,” Sunderman said. “Look at the flow of money from the Federal Reserve. It’s virtual money, with a balance sheet of $4 trillion by end of year if it continues at this pace.”

“Right now, money is going out,” he said. “The major funds lost money last year as they did not know how to handle future contracts. They are gun-shy right now. Soybeans are sexy, and they can understand how demand is measured. There are reports so they know how much crush and how much the export market will be. With corn feed, usage is not really known, and stocks reports are an adventure. The chief USDA economist says that ‘If numbers are off, then it must be the trade that is off.’ How many believe that?”

Sunderman said that many of the private tours of crops are being watched. Some came out with high yields, but as late as some of the crop was, they are now seeing kernel abortion. Cool temperatures have masked the impact of dryness in the fields.

Soybeans are where the real story is. Predictions were for an average of 42.6 bushel per acre yield last week. Based on the current weather, lack of rain and excess heat, 42.6 is good estimate. Some fields are showing high pod counts, but Sunderman said he didn’t know how many will stay on or how full they will they fill, which means the average could be 39.5. That would be very bullish soybeans. If it drops further, soybeans will be above $15. It’s not an easy ride.

Sunderman has been a market analyst for the Farm Progress Companies editorial team.