Know Commodity Markets To Inform Business Decisions

Knowing how much a commodity is worth before selling is a necessary and obvious requirement for successful marketing. Having a good idea of medium- and longer-term market trends, however, can help farm operators develop more profitable marketing and production strategies before it comes time to sell.

Commodity tracking helps inform your strategy against lower farm gate returns. For commodity market veterans J.P. Gervais, vice-president and chief economist for FCC, and Philip Shaw, grain farmer and author of Grain Farmers of Ontario’s Market Trend Reports, it’s important to know what commodity tracking can mean, what to watch and pitfalls to avoid.

Develop a pricing strategy
For Gervais, commodity tracking could mean focusing on fundamentals such as supply, demand and reserve stock volumes and more technical, financial aspects like futures markets and what movements in those markets indicate. Generally, he encourages farm operators to understand what events are spurring changes in commodity prices longer-term.

Consider what types of events should make me revise my strategy.
“You must have a pricing strategy and some basic rules of thumb. Tracking prices is kind of required, but understanding commodities goes deeper than that. A next step would be to consider what types of events should make me revise my strategy,” Gervais says.

Events that can dramatically affect commodity prices are not in short supply — the outbreak of war on a large scale, pandemics, energy price spikes and dips, significant changes to import policies enacted by foreign governments are examples — and the sheer volume of information available to those trying to form reliable predictions can seem overwhelming. Gervais says it’s critical to “cut through the noise” by identifying which type of event should spur action.

“For example, are futures markets indicating there is less feed demand from livestock in the United States due to a smaller herd? If this is the case, will it actually be significant enough to warrant changing my market strategy? You might want to ask whether you need to be more patient,” Gervais says.

“Don’t change strategy unless something fundamentally changes.”

Know your geography
There is a comparative cornucopia of information available for tracking futures trends, according to Shaw. Futures markets, however, need to be balanced with Canadian basis values. Focusing too much on one over the other can paint an incorrect picture of where commodities are trending.

“Sometimes movements of basis values can be greater than the volatility in futures prices, sometimes over a short-term period,” Shaw says. If the Canadian dollar flutters around a rate favourable to Canadian grain prices but rises by 10 cents, for example, the cash basis would drop regardless of futures prices.

Focusing on the cash basis for a given commodity can be challenging, however, as there is often limited available information on which to base one’s marketing strategy. Shaw says this is a result of competition in grain merchandising, with merchandizers being somewhat secretive about their information as well as the regional nature of basis values.

“It’s difficult to know how much grain is being shipped, but that information is vital. Sometimes Quebec receives Ontario grain, which helps the basis values in Eastern Ontario. But sometimes Quebec imports American corn despite bidding on Eastern Ontario corn, maybe Brazilian corn too. It’s the value which determines when grain is moved, bought or sold. If the price gets too high, they will import from somewhere else,” Shaw says.

“You can keep track of futures because it’s relatively easy to do. It’s much more difficult to know the cash movement of grain. The realities for the cash marketplace in Chatham, Ontario, are so different than they are in Toronto or close to the Quebec border. You need to try to know what that is. Wherever you are, you can try to have an appreciation for trends in the cash market – but it’s very difficult to know.”