Prices on the international grains market.

How on earth are the prices determined on the international grains market?

Well this is a very interesting question and I wish the answer was simple:  I remember in one of my first economy classes at high school the theme of the lesson was the role of supply and demand in a market.  It was very clear from the discussion that in a perfect world it would be the forces that determine price.  If the supply of the commodity was higher than the demand the price would be forced down - while the opposite was also true where if the demand would be higher than the supply the price would be forced up.

Now we know we are not in a perfect world and these days all depend on the supply and demand and the market sentiment.  We have witnessed that over the last few years perceptions have caused very interesting fluctuations in the prices on the international grains market.

Recently in the previous week we have seen that there was a perception amongst traders in the world that the US weather in the corn growing area might be just about getting a tad too dry and it coupled to a real threat of hot and dry weather in the European and Russian wheat growing areas lead to a upward surge in prices and then after a little rain over a weekend the prices just came tumbling down when the perception changed again?

What is very interesting is that the seasoned traders all over the world would tell you that the basic an fundamental trade almost always would stand the test of time - as long as one does not run after the general perceptions and one does not run out of cash in the process.

Several people have over the years tried to look at so-called seasonal and other analysis but the real test is the basic fundamentals of supply and demand - and the perceptions as to the expected crop size and consumption in the market.

Short term effects on the prices however could be caused by almost every possible perceived cause or even rumours.  That lead to a "axiom" in the trading community that says:"Buy the rumour, sell the fact".

Therefore I am convinced that the prices of grains on international grains market would ultimately be determined by the real supply and demand figures in the world.

JD

Where are the International grains markets?

The market where international trades in grains are concluded does not have a single location.  There is a Grains Trade Convention to which the members (read countries) that are major role players in the international grains market are participants.

The reality is that both importers (buyers) and exporters (sellers) are signatories to the convention and they usually do the trades on the market in the country where the seller is located.  Currently the grain trades are always somehow referenced to the trades on one of the major exchanges in the USA.  Most Corn deals are referenced to the Chicago Board of Trade while Wheat would be referenced to either Chicago or Kansas.

As other countries are also involved and this would include Argentine, Germany, several of the former USSR republics and Australia.  As one can appreciate the issue has become not merely the price of the grain but also the price of transport to get it to the destination.

As an example one would find that Corn would trade at a specific price on the CBOT market while the end user in a country somewhere in Africa will get the imported maize at a price of up to 3 times as much.

In terms of specific products and markets - one interesting fact is that although grain that is known as Corn in the USA is known as Yellow Maize in Africa.  While the rest of the world produce yellow maize and it is seen as the most efficient product Africa for some reason will just not use yellow maize.

I would now try to look at the factors affecting prices.

JD

International Grains Markets.

The international Grains Market has two main components: Firstly we have the physical market where the actual grains are traded and secondly we have the futures or derivatives market where the instruments derived from the physicals are traded.

I will for now focus on the derivatives market.

People often ask why is there such a thing as a derivative with grains?  Well the futures market exisit purely to assist the physical market to get to a reasonable price.  What happens is that the buyers and sellers arrive at the "market" which is these days literally a computer screen where as it used to be "the pitts".  On the Chicago Board of Trade the trading is still mostly done in the traditional way especially during the day.  The so-called "overnights" and international trading would be electronically traded.  In this process the bids and offers they arrive at a price.

The process is that the most of the deals on the derivatives are for delivery on a date in the future.  That is why they are called futures.  The normal point of view is that the party that sells the contract has the larger exposure and usually has to be the party that eventually hold the underlying.

Exactly this has lead to the development of yet other derivatives with the same underlying stock or commodity.  That is options.  There are two types of options so-called call options and put options.

In this blog I am going to discuss the detail regarding Futures, Options and then get to the effect of the physical trading.

For now lets work with the details and consider the market and the prices - delayed "live" prices will be shown on this page soon.

Greetings
JD