In a few short months, the ground will thaw and planting will activate. Along with the chicken feed in season will come an abundance of marketplace opinions (mostly bullish) about where prices are headed this year. Before you amuse swept away with all the altered analyses, there are six things about grain prices that you should accumulate in apperception every year. ABOUT THE AUTHOR
One: Farming is one of the most competitive bag environments that you will ever acquisition. There are thousands of producers of assorted sizes, none of which has any clout when it comes to haggling prices. The grain producer is the prime archetype of a “price-taker” and that actuality alone tells us that over the continued haul, grain prices will spend most of their age near or below the costs of production.
Two: Thanks to human attributes, the price cycle for grains is strongly asymmetrical, acceptation that prices spend far added age in downtrends than they accomplish in uptrends. When prices are acceptable, producers are eager to expand production and the entire ag industry is eager to advice them. The rush to produce added is what kills an uptrend. On the other hand, when prices are bad, there is no hurry to cut production. Nobody wants to blaze workers or auction off equipment until they certainly accept to. Without a government program, there is no incentive to cut back acres. It takes much longer to bring about the behavior that ends a downtrend.
Three: According to it or not, subsidies that are above the cost of production animate added production, larger grain stockpiles, and longer downtrends. As a acceptable archetype, attending at the cocoa marketplace. Cocoa prices accept been in a downtrend for 24 age, thanks chiefly to the subsidy policies of the Ivory Coast. You should again apprehension that governments are most likely to abandon those subsidies when prices are at their worst. It’s accessible to amuse political abutment for subsidies when the cost is baby. It’s another matter, when grain prices are in the container and the cost of those subsidies becomes expensive.
Four: Traditional economic theory relies on the consumer captivating advantage of low prices to bring balance to the marketplace. However, low prices, in and of themselves, accomplish not stimulate enough consumption to balance marketplace forces. Appearance me a marketplace with low prices and a bearish outlook and I will appearance you consumers that are in no hurry to buy. Why should they be in any rush when they are expecting abundant supplies subsequent? Let the other guy pament for storage. Bullish marketplace outlooks and a abhorrence of tight supplies are what stimulate marketplace buying; not low prices.
Five: Producers appetite to hear bullish marketplace outlooks early in the year and there will never be a shortage of advisories that are ready to accommodate them. It is alone human to appetite to hear acceptable statement. Unfortunately, bullish outlooks early in the year discourage producers from hedging their risks when the costs of doing so are advantageous.
Six: When it comes to predicting the approaching, there are no experts. Battle, weather, disease, government policies, and international crises all accept huge, unpredictable influences on marketplace prices. It doesn’t matter who you are or how much you anticipate that you apperceive, the marketplace will always be a source of surprise to its participants. It is not astute to allowance yourself accessible to anyone’s prediction.
Soon you will be hearing about how this will be the year that soybeans hit $7.00 and corn goes to $3.50. Who knows? Maybe this will be that one year when farming really pays. But aloof in position it’s not, it would be astute to attending at your options, accede the six things above that are accurate for grain prices every year, and protect yourself from the risk of lower prices.
Dailyfutures.com. February 12, 2002.
Dailyfutures.com is a chargeless source of statement, articles, and advice for the commodity futures markets.
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Originall posted August 14, 2012