Role of a trader in soft commodities/grains.

Absolute musts for analysis and before any trading decision is made:

  • A thorough world-wide S&D (Supply & Demand) analysis of - as a minimum - the 3 major grains (corn, wheat, soybeans) and on a monthly basis.
  • Analysis on returns for the most profitable crop (can be quite different in different countries)
  • Analysis on what price level the farmer will switch from one crop to another
  • Analysis for alternative crops (sugar, cotton, potatoes, tapioca, sorghum, lupines etc) with focus on needed crop rotation, fight for acres etc.
  • Analysis on possibility of double cropping
  • Analysis on financial situation of the farmer and eventual consequences of farmer attitude in holding or selling his crop(s)
  • Political situation in the major growing countries and eventual impact on planting intentions
  • GMO’s or not? Both for supply and demand
  • Internal storage and transport situation
  • Port situation (both for exports and for imports); are there problems with loading or discharge capacity and are there risks for delays, strikes etc.
  • Freight market outlook and eventual impact on final landed prices and hence demand. Also what impact on which supply country is best placed for exports
  • Economic situation in both supply and demand countries and eventual impact on supply and/or demand (re- or devaluation potential, fiscal changes etc). Impact of improved or deteriorated economic situation on demand. And what kind of demand (big difference in emerging markets versus OECD countries).

Extremely important issue for demand:
timing of the demand coming to the market and in what form.


Specific questions/analysis for the major grains.

A. Corn.

Demand.

  • feed demand (esp. number of animals and profitability of meat production)
  • food demand (esp. price sensitivity). E.g. hardly any price sensitivity in South Africa for white maize
  • ethanol demand (outlook for oil/gasoline prices)
  • industrial demand (eventual different industrial applications)
  • price sensitivity on demand side

Supply.

  • Weather
  • Subsoil moisture
  • crop situation
  • yields
  • sensitivity for increased/decreased fertilizer and pesticide usage
  • timing of crops becoming available

Other issues.

  • political situation and/or changes re ethanol (feed/food versus industrial usage)
  • supply of feed wheat (depending on quality of wheat coming from the fields; very much dependant on weather in the end of the growing season or at moment of harvest)
  • prices of alternative energy suppliers (corn is used as a form of energy in feed) such as tapioca, sorghum etc


B. Wheat.

Demand.

  • food demand of the several kind of qualities of wheat
  • eventual feed demand
  • eventual ethanol demand
  • price sensitivity (much more important in eventual feed and ethanol usage)

Supply.

  • type and quality of wheat (durum, spring, soft etc)
  • weather
  • subsoil moisture
  • crop situation
  • yields
  • sensitivity for increased/decreased fertilizer and pesticide usage
  • timing of crops becoming available

Other issues.

    • since wheat is mainly used for food, it can be an extremely sensitive political issue (e.g. Egypt)
    • quality is a very important issue
    • poor harvest conditions can impact the quality of wheat and degrade it to feed wheat usage only

 

C. Soybeans.

Contrary to wheat and in some cases corn, soybeans are not directly usable as a food or feed element. Soybeans need to be crushed in a crushing plant and will then provide meal and oil. Soyameal is a protein provider and is mainly used in the compound feed industry; to a lesser extend it can be sometimes used for other industrial products (protein products like tofu, meat etc). Soya oil is mostly used in food (cooking, ingredients etc).

In analyzing soybeans, you must include other similar products, rape seed, sunflower seed, cotton seed, palm etc. All these products are as well crushed in order to obtain oil and meal. Oil might be produced sometimes differently olive oil, fish oil etc but in general the quantities available for these special products do not impact in any significant way the overall S&D for oils and meal.

An interactive S&D analysis is necessary for the supply of the main product (the bean or seed) and for the derived products (meal and oil).

The analysis for oil is rather complex since the taste and quality of oil is sometimes very different and elements like price (in poorer countries), taste and health issues (saturated fat is an issue in many OECD countries) play a major role in the final demand side.
Demand for oil has been strongly impacted in recent years by the biodiesel and the sustainability debate. Analysis should be based on the main vegetable oil (soya oil) and depending on S&D of the respective other oils, the level/price range of discount and /or premium for that oil should be established.

Demand.


Beans and seeds.

  • where are the crushing plants
  • economics of crushing at origin or at destination
  • crushing margins

Meal.

  • feed demand (esp. number of animals and profitability of meat production)
  • industrial demand (eventual different industrial applications)

Oil.

  • food demand (price elasticity of demand)
  • demand for specific oil (must or a want; if a want at what price spread)
  • biodiesel (an issue for rape oil, palm and to a lesser extent soya oil)
  • palm oil has become a huge factor in the oil S&D with food demand mainly in Asia and mostly industrial applications in the OECD countries

Supply.

  • Beans and seeds.
  • Weather
  • Subsoil moisture
  • crop situation
  • yields
  • sensitivity for increased/decreased fertilizer and pesticide usage
  • timing of crops becoming available
  • soybeans are typically a 6 month cycle with substantial crops in both USA and the Southern hemisphere. Palm is a Southern hemisphere equation and rapeseed and sunflower seed a Northern hemisphere.

Finalization.

When all analysis is done, try and come up with conclusions:

  • What is driving the market? Supply side or demand side?
  • Are there timing issues?
  • Assess when and where higher or lower prices will impact demand.
  • Based on above, try and set price parameters/ranges

Finally conclude with a game plan on:

  • what to buy and/or sell,
  • initiate eventual spread positions (inter commodity, calendar, commodity spread, quality, origin etc)
  • when
  • at what price level

And then:

  • Check Risk Management issues (limits, counterparty risk etc)
  • Execution and trade

And constantly followed up by:

  • Analyze market action constantly
  • Update S&D constantly (weekly and monthly import and export statistics, transactions effected, updated crop reports etc)
  • Review game plan  and Risk Management issues daily