How traders can profit from the global grain price slump

Declines in soft commodities may not last long.

 

A glut of grains on the world market has meant plummeting wheat, corn, and soybean prices. Last year, great weather coincided with high levels of planting in key growing regions around the world, leading to record harvests. 

 

Some analysts had worried that sanctions on exports from Russia and Ukraine, imposed by the West last year, would limit grain supplies on the world market – but this ended up having little effect.

 

“The impediment to exporting [commodities] out of Ukraine never really materialised, so the world was flush with supplies of all three grains. We had almost perfect conditions [for grain supplies],” explains Nitesh Shah, of ETF Securities.

 

Now, good weather has continued in grain-growing hotspots and analysts are expecting another strong harvest season. These forecasts are further pushing down prices. 

 

Wheat fell 6 per cent last week as rainfall in the US’s great plains – a key growing area – increased the likelihood of another record harvest. The price of wheat has fallen 25 per cent over the last year, according to the S&P GSCI All Wheat GTR index.

 

Prices of both corn and soybeans have also fallen, and the crops are now 14 per cent cheaper than 12 months ago.

 

The signs suggest prices will continue to fall through 2015. “There have just been ample supplies and this year there is expected to be another record harvest for both wheat and corn,” explains Hamish Smith of Capital Economics. “I am quite bearish on prices this year… I don’t think there is likely to be any shortage of crops.”

 

This negative outlook could be positive for traders who short the price. “The downward trend is going to continue across the markets and I would suggest that, if you want to be aggressive, you could get your short positions on now,” says David Madden of IG.  He is expecting prices to fall over the next two to six months.

 

Recently, grain prices have tended to rise briefly before falling again, and Madden expects this to continue while the overall trend remains downwards. He suggests using these peaks as an opportunity to short, so when the price does fall, it has further to slide. 

 

 “If you want to be cautious, or a bit more sensible, any rallies you see should be used as opportunities to sell. These grains are all in a downward trend for the next couple of months,” Madden says.

 

The strong dollar has also made Chicago-traded soft commodities less attractive to overseas buyers. With their massive populations, China and Brazil are big importers of grains, but both countries are having a tougher time economically and are choosing to source grain supplies from cheaper South American growers. 

 

“China is not splashing the cash around, it is becoming more financially savvy,” Madden says. “Brazil is having to behave more competitively now, whereas like China it was more relaxed because of its economic success during the era of the Bric economies.”

 

However, the weather in some growing areas – particularly South America – is highly changeable. This can have a rapid impact on crop forecasts and prices on the world market. 

 

Meteorologists were expecting the warm weather front, known as El Nino, to arrive this spring. El Nino is an unpredictable phenomenon which appears every three to five years, but it has failed to materialise so far this year. 

 

This means expectations of better weather during 2015, which equals higher harvests next year, may be misplaced, ETF Securities’ Shah explains.

 

Moreover, lower prices of wheat and corn mean farmers have been planting lower levels of the crops.  Both these factors mean some experts believe grain prices will rise again in the longer term. 

 

“We doubt there will be perfect weather conditions two years in a row. For wheat and corn we do think there are opportunities,” says Shah. 

 

He is expecting price increases of 5-10 per cent in both crops over the next 12 months, although soybean prices are not likely to be higher any time soon. 

 

Unlike wheat and corn, soybeans benefit from an extra source of demand as they are used as biofuels. Farmer surveys show an intention to plant more soybeans, and many analysts expect demand to remain buoyant too.

 

To long or short the grains, spreadbetters have markets for trading these soft commodities. Passive fund providers including ETF Securities offer both exchange-traded funds and leveraged products which can go short and long corn, wheat and soybeans.