Speculation in agricultural commodities markets is causing greater volatility in prices than in the past, affecting everyone from the farmer to the consumer, according to farmers and grain dealers in eastern New Mexico.
Agricultural commodities are certain farm products, including corn, wheat, milk, cheese and cotton, that are traded internationally, much like the stock market. Oil is also a commodity.
Roosevelt County farmer Kevin Breshears said when the stock market crashed in 2008, traders switched from it to speculative trading in the commodities market.
Because so many speculators trade to make money apart from handling commodities, he said, prices spike or drop violently.
“This is not a true market,” Breshears said.
Traders respond to news that might affect commodity prices, but they react on emotion rather than on supply and demand, he said. The market moves up or down correctly, Breshears said, but it moves farther than it should.
“This whole futures and commodities market is going to affect everybody, whether you know it or not,” he said.
The effects reach as far as the food store and gas pump, Breshears continued.
Farmers are happy with the high prices they can get for just about any crop now, he said, but that translates into high feed costs for dairies, hurting their profit margins on the heels of low milk prices in 2009 and 2010.
The volatility of the market also makes it hard for farmers to decide when to sign contracts locking in the price they’ll receive for the upcoming harvest, Breshears said. With the price locked in, they could miss an opportunity to sell higher if prices jumped, but the contract could also protect them from a deep drop in prices.
“A farmer needs to decide on what’s a good profit and be happy with that,” Breshears said.
He believes contracts setting a good price, even if it’s not the highest the market might reach, are the safest way to go.
Broadview farmer Pat Woods, who grows dryland wheat and milo, said another struggle in dealing with the commodities market arises when farmers sell their crop in advance on the futures market instead of signing a contract. When they deliver the crop to a local grain elevator, a “basis” will be deducted from the futures price they signed up for on the market.
J.D. Heiskell Holdings LLC Manager of Grain Trading Ben Buie said the local basis changes based on freight costs, crop quality, local demand and weather’s affect on crops. He said the basis changes in much smaller increments than the futures market, minimizing the risk to the farmer.
However, Wood said it’s difficult because farmers can’t know the difference between the futures price and the local price, and the market is “out of kilter.”
“It’s hard to lock in a reasonable profit because there are so many variables on this deal,” he said.
Only at a few specific futures market delivery points can a farmer get the futures price without dealing with a basis. If local grain elevators were delivery points for the futures market, Wood said, the difference in futures and cash prices would be eliminated, as would speculation on it.
“That would probably affect my bottom line more than anything they could do on the Farm Bill,” he said.
Still, J.D. Heiskell Holdings LLC Plant Manager Eldon Merrick said more and more farmers are choosing to sell on the commodities futures market in an attempt to increase their profits.