I was talking with one of my farmer friends about the possibility of rising food prices.
One of the insights he shared with me is that prices at the farm level are driven more by the commodity markets and "Technical Analysis" more than by "Fundamental Analysis".
"Technical Analysis" vs "Fundamental Analysis"
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| Corn prices 2015-2019 more-or-less |
Technical Analysis is the practice of looking at historic price charts to get a feel for future price movement.
For example, you might look at the chart shown above and if you needed to buy corn for an ethanol plant or to feed cattle, hogs or chickens you might determine that $3.40 a bushel was a great time to buy "contracts" for corn.
Conversely, if you produce corn you might look at the chart and decide any time corn was selling for over $3.80 a bushel is a good time to sell some of your corn.
Those price supports or limits act like guard-rails. Some of the time the market wanders aimlessly near the middle of the road but much of the time the market is leaning against one of those rails.
There are some seasonal patterns in this chunk of data. Prices are highest in May-June and lowest in August.
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| Corn prices 1975-to-2007. If corn prices had kept up with the Consumer Price Index $3 corn in 1975 would be $8.55 corn in 2007 |
Fundamental Analysis looks at costs-of-production and demand. If cost of production is lower than the prices created by demand, more producers will enter the market. If the price supported by demand is lower than the costs-of-production then the highest cost producers will leave the market and production will drift down and prices will gradually firm-up.
My friend suggested several characteristics that make corn (and soybeans and wheat) amenable to being treated as commodities. Commodities are attractive to speculators. Speculators are more likely to rely on Technical Analysis than other investors.
- Easier to store than gasoline
- Storage life measurable in years
- Harvest happens one time of year but demand occurs throughout the year
- Easier to transport than gasoline
- Easy to handle. Can be moved from one container to another with an auger
- Narrow range of "Quality" characteristics
- Available in vast quantities
- Universal demand
- Enough short-term price movement to attract speculators
Ahh, yes! Elasticity of demand. The world requires a certain amount of any commodity each year, so the demand is relatively inelastic. Whether corn, or wheat, or unleaded gasoline, all commodities work the same. Farmers bet on it every year, because yellow dent corn in Louisiana is just like yellow dent corn grown in the Dakotas.
ReplyDeletePerhaps it is that "elasticity of demand" that is urging many farmers around here to install grain bins. Having the ability to "sell" when the price is better seems to be the motivation. It is still a mad rush to get the crops off, and the roads are choked with farm machinery, and the trucks run all night.
ReplyDeleteMy casual observation of the "farm reports" on the radio is that bean prices move downward almost as soon as the combines start on the bean fields, same with corn.
Another great thought provoker article Joe. Thanks.
p.s. I really enjoyed the swimming in November thing.