Knowing how much a product is worth before selling it is a necessary and obvious prerequisite for successful marketing. However, a good idea of medium- and longer-term market trends can help farmers develop more profitable marketing and production strategies before it comes time to sell.
Commodity tracking helps you strategize against lower yields from the farm. For commodity market veterans JP Gervais, FCC vice president and chief economist, and Philip Shaw, grain farmer and author of Grain Farmers of Ontario's Market Trend Reports, it's important to know what commodity tracking can mean, what to look for and the pitfalls to avoid applies .
Develop a pricing strategy
For Gervais, commodity tracking could mean focusing on fundamentals such as supply, demand and reserve inventory levels, as well as more technical, financial aspects such as futures markets and the movements in those markets that indicate them. In general, he encourages farms to understand what events lead to changes in commodity prices over the longer term.
Consider what types of events should cause me to rethink my strategy.
“You need to have a pricing strategy and some basic rules of thumb. Tracking prices is necessary to some extent, but understanding commodities goes even deeper. A next step would be to consider what kind of events should cause me to rethink my strategy,” says Gervais.
There is no shortage of events that can dramatically impact commodity prices – the outbreak of a large-scale war, pandemics, rising and falling energy prices, significant changes in import policies by foreign governments are examples – and the sheer amount of information available to those who do trying to make reliable predictions can be overwhelming. According to Gervais, it's important to “cut through the noise” by figuring out what type of event should inspire action.
“For example, do the futures markets indicate that there will be less demand for feed in the United States due to a smaller herd? If this is the case, is it actually significant enough to warrant a change in my market strategy? “You might want to ask if you need more patience,” says Gervais.
“Don’t change strategy unless something fundamentally changes.”
Know your geography
According to Shaw, a comparative wealth of information is available to track future trends. However, futures markets need to be aligned with Canadian underlyings. Focusing too much on one over the other can paint a false picture of where commodities are trending.
“Sometimes the movements in underlying assets can be greater than the volatility of futures prices, sometimes over a short period of time,” says Shaw. If the Canadian dollar fluctuates around a rate favorable to Canadian grain prices but rises by, say, 10 cents, the cash basis would decline regardless of futures prices.
However, it can be difficult to focus on the cash basis of a particular commodity because there is often limited information available on which to base one's marketing strategy. According to Shaw, this is a result of competition in grain trading, where traders tend to keep their information and the regional nature of the underlying assets secret.
“It is difficult to know how much grain is being shipped, but this information is vital. Sometimes Quebec receives grain from Ontario, which helps core values in Eastern Ontario. But sometimes Quebec imports American corn, even though it has bid on corn from Eastern Ontario, perhaps Brazilian corn as well. Value determines when grain is transported, bought or sold. If the price gets too high, they import from somewhere else,” says Shaw.
“You can keep track of the future because it’s relatively easy. It is much more difficult to know the money movement of grain. The realities of the cash market in Chatham, Ontario are very different than those in Toronto or near the Quebec border. You have to try to figure out what that is. Wherever you are, you can try to understand the trends in the spot market – but it is very difficult to know.”
Be a lifelong learner
Becoming proficient in tracking goods takes experience, and both Gervais and Shaw say there are resources that can help individuals cut through the proverbial noise. Gervais says USDA's crop, livestock and dairy reports are a great example of reliable, trustworthy resources that are directly relevant to Canadian farm operators.
“Identify trusted sources, learn, and don’t overreact. “Markets are moving,” says Gervais.
“Have humility. Change your outlook or forecast if the markets prove you wrong.”
From an AgriSuccess article told to Matt McIntosh.
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