Back to the Futures: New year, new markets, shortages to surplus and geopolitical change
[Editor's note: Every Friday visit the Business 380 for "Back to the Futures," a quick discussion of the week's grain, livestock, gasoline prices and other topics.]
New Year, new markets
As we prepare to switch the calendar, many futures market participants are already looking ahead, trying to predict the values of commodities for the upcoming year. As farmers plan out the crops they’ll plant and the size of livestock herds they’ll keep, they frequently use the futures markets to help them lock in prices for grain and animals to help ensure profits. Likewise, mining companies and energy producers use forward projections to help make decisions on new projects. Meanwhile, end users of commodities are hoping to lock in prices for the goods they buy so that they can profitably convert commodities like soybeans, lumber, natural gas, and copper into the finished goods they sell to the public.
In coming months, there are a few general themes that may guide the futures markets.
Shortages to surplus
Over the last year, various commodities markets have seen an increase in production and falling demand, which has resulted in rising inventories and falling prices. The best example of this phenomenon is corn; after a record crop this year, corn prices collapsed from $7.46 last January to only $4.26 on Friday.
Other markets like copper, gold, wheat, and coffee are experiencing similar price pressures due to high levels of production and tepid demand.
Fed pulling back
For months, traders have been anticipating that the government’s stimulus program would be reduced, which led to rising interest rates and falling prices for gold, partially unwinding the impact of stimulus. Earlier this month, the Federal Reserve announced it was reducing its bond and mortgage buying program by $10 billion per month, which confirmed the market’s expectations. In the coming months, economists expect that the economy will be further weaned off of stimulus, but the pace of the changes is still unknown.
Changing geopolitical landscape
As 2013 comes to a close, a series of global political concerns remain on the radar. The ongoing civil war in Syria, a nuclear standoff with Iran, North Korean threats, and rising tension between China and Japan over maritime territory all threaten to disrupt global commerce.
Meanwhile, the European Union’s economy is stabilizing, and there is increasing talk of a Trans-Pacific free trade agreement that could sharply increase trade between the US and other nations. We may not resolve any of these questions during 2014, but any of them could create major moves in the commodities markets and warrant a watchful eye.Opinions are solely the writer's. Walt Breitinger is a commodity futures broker with Paragon Investments in Silver Lake, KS. He can be reached at (800) 411-3888 or www.indianafutures.com. This is not a solicitation of any order to buy or sell any market.