Trader: Grain market volatility is here to stay
By Janet Kubat Willette
Date Modified: 12/27/2012 8:46 AM
ROCHESTER, Minn. — Volatility in the marketplace has increased and farmers must learn how to handle it, a trader told more than 60 people gathered for a recent Corn and Soybean Management meeting.
Often there isn't a reason for the volatility, said Gordon Kralovetz, a senior trader with Slipka Futures who has been a trader of commodities and options since 1983.
Take 2012 for example. In May and June, everybody thought the market was trending lower. Then the drought took hold and prices soared.
One reason for the volatility is a 10 percent change when corn is $7.50 is a bigger move than when corn is $3.50, 75 cents compared to 35 cents.
A lot more dollar value is involved, Kralovetz said.
Another reason for the volatility is the amount of outside money coming into the market. Hedge funds, exchange-traded funds and sovereign-wealth funds may all trade in the grain market, he said.
"With a mid-sized merger on Wall Street being the same size as the soybean crop here in the U.S., these funds can have an outstanding impact on the price of commodities," Kralovetz said.
The traders are different, too, he said. Increasingly, they rely on computers for market direction and have little or no fundamental knowledge of how the market works.
"These guys do not have market skills, as their background isn't in investing, so their entry and exits are often very violent as they get in and out," Kralovetz said.
USDA also plays a role in volatility, he said. Crop reports used to be pretty accurate, but now are becoming less and less reliable.
As an example, he said this spring USDA was predicting a record 166 bushel per acre corn yield.
"There was no possible reason to predict a record yield, yet that's the number they went with, costing farmers here in the U.S. many millions of dollars," Kralovetz said. "They cannot be relied upon for fairness and accuracy."
Media consolidation is also impacting agriculture. In a nutshell, because of increased mergers and consolidations, there are fewer reporters and those left are paid less. Reporting has become an entry level job, with reporters moving into public relations after a few years.
As a result, less emphasis is placed on original reporting and certainly critical reporting that may annoy the corporation that owns the news outlet. There is also an undercurrent that any reporting that annoys the government may limit or cut off access. In order to keep access, reporters don't scrutinize what's said by the government.
When it comes to grain prices, Kralovetz is bullish for the long-term. Here's a couple reasons why:
• Population growth. The world's population has grown by over a billion people since 2000. People in developing nations are eating better and in India and China people are moving from the country to the city. In China alone, more than 50 million people stopped farming and moved to the city in the last decade. At the same time demand for food is increasing and the amount of land available is decreasing. Urban growth eats into land. This has slowed in the last four years in the United States, but continues to increase in India and China.
• Weather. There is a lot of scary weather data out there, Kralovetz said. The last 332 consecutive months have brought higher than normal temperatures worldwide. Droughts have been more devastating. Believe in global warming or not, it is real, he said, and weather disruption is negative for agriculture. Larger rainfall or snowfall amounts are becoming more common. Farmers are on the front line of changes in weather patterns.
There are other risks. Congress and the president could fail to reach a deal on the fiscal cliff, which would likely take the stock market down and the rest of the economy with it. Another risk is a European Union economic meltdown, which would decrease market opportunities for U.S.-grown grains. Third, China's slowing growth could take them out of the grain-buying mood. Hedge funds could also send the market down just by selling.
When it comes to choosing a partner for trading, Kralovetz encouraged the farmers gathered in Rochester to consider several sources. Write down what they say, he said, and see which claims are accurate.
"The bottom line is this," Kralovetz said. "Larger and faster moves are here to stay. You must learn to live with them, either by taking a longer term view in your marketing and/or becoming more versatile in the kinds of positions you take, or being more nimble and being willing to take a profit or small loss more often."