Understanding Grains Volatility and Supply and Demand

As with all goods and services, the price of grain and oilseed products is determined by the intersection of supply and demand, which are affected by many factors.

As you may expect, one of the main factors affecting supply in the grain markets is weather. From the time that man began cultivating grains and oilseeds, producers have been at the mercy of mother nature, hoping for ideal weather to achieve an optimal harvest. Drought conditions caused by too little rain has the effect of diminishing grain yields, which will reduce supply and increase prices. Too much rain could delay harvest, which could also lessen supply and cause higher prices. However, it could also diminish grain quality, which could actually decrease demand as buyers seek out substitutes to fill their needs. A late spring frost arriving as young seedlings begin to appear could damage crops, affect quality and decrease yield and the supply of grain available. In some cases, such as with winter wheat, too little snowfall means that it will not receive insulation needed to protect it from outbreaks of severe winter cold.

In addition to the weather, the prices of inputs required to grow grain, such as seed, fuel and fertilizer, will also impact supply. Lower input prices increase expected profitably and encourage producer to plant more acres, potentially increasing supply. Improved production methods, including enhanced technology, better fertilizers and more effective management of resources will also boost harvest yields and the supply of grain.

The demand for grain and oilseed products is influenced by several factors, including changing demographics, economic growth and changes in diet and consumption patterns.

Global growth in population, especially in Asia, means more mouths to feed around the world, causing rising demand for all food products, including grains and oilseeds.

Economic growth, particularly in developing countries, encourages more people in these regions to move from rural to urban areas where they earn more income. Greater income allows them to be more selective in the food they consume, usually choosing foods with greater protein content. Grain and oilseeds are used extensively to produce protein from livestock and economic growth significantly increases demand for them.

Finally, ever-changing consumption and dietary trends, such as low carb and gluten free diets, tends to lower the demand for certain whole grains and grain-based staples. However, these trends are often counterbalanced by higher consumption of meat, fish and poultry, again leading to an increase in the demand for grains and oilseeds used to manufacture livestock feed.

These are just some of the key factors affecting grain and oilseed supply and demand. There are many other factors that play a role in supply and demand, such as energy, interest rates and currency risk. Because it is difficult to predict the extent to which these conditions will impact the grain and oilseed markets, it causes volatility in the market because each user has different expectations of the different causes and effects. In the futures markets, participants seek to take positions on what they think grain prices will be in the future; the forces of supply and demand ultimately come together to discover price and cash and futures prices converge.

At every stage of the grain and oilseed chain, from planting, growing and harvest, to exporting, milling and baking, market participants face volatility and the risk of adverse price movements caused by the idiosyncrasies of supply and demand.

Futures and options on grains and oilseeds provide a means to manage this risk as well as to take advantage of potential profit opportunities.