Volatility

WEB_MAO1681Volatility. It can be a scary word, but it’s also a word that’s welcomed with open arms in the grain business. Volatility provides opportunity. Volatile markets have wide price fluctuations and heavy trade volumes within short periods of time. We have not seen extreme volatility in the market in quite some time. A lack of volatility can easily lull a person to sleep. That’s exactly what the market has done over the course of the last several months. It’s allowed us to fall into a sleep rather than keeping us awake at night. The market’s inability to move around a lot has minimized the number of opportunities for you as a producer to capitalize on major changes in futures prices or basis.

It’s difficult for basis to change significantly when the futures market doesn’t make significant changes itself. We’ve entered a time where the markets have become very stagnant, both futures and basis. The futures market has no desire to move much as the bears focus on the large crop the U.S. just produced, the strength in the U.S. dollar and its negative impact on grain exports, and the falling price of crude oil which ultimately impacts the ethanol market. Bulls are looking at the potential for the El Niño weather pattern to make a hard shift to a La Niña weather pattern during a crucial growing stage late this summer. The problem with this idea is it’s just too far out. It’s not something that is going to create high volume trade in the short-term.

Basis has failed to make significant changes for similar reasons. End users have developed the “wait and see” mentality. The inability of the futures market to have wide price fluctuations has kept end users from having to make major changes to basis values. Look at the size of the crop in the U.S., the dismal export picture, the negative ethanol margins, and all of a sudden you can’t blame them for having the “wait and see” mentality. The mentality keeps them very front end driven. If it gets them in a pinch, well, they’ll worry about that when the time comes, but for now, they’ll just make sure they’ve got what they need to get them through the short-term.
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As I stated before, volatility is welcomed with open arms in the grain business, but for now, I guess we will just have to “wait and see” what happens down the road because I don’t anticipate this changing anytime soon. Hopefully, as spring approaches, we’ll see some weather-related fireworks. Until then, stay tuned and try not to get lulled to sleep by the lack of volatility because just when you think it won’t happen, it will happen!