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Ask the Analysts: How do different commodities interact with and influence one another?

posted on July 22, 2014


How do different commodities interact with and influence one another?  In each Ask the Analyst segment, experienced commodity market analysts provide thoughtful insight on trading skills, price trends, and strategies to help students and producers better understand how the markets work.

How do different commodities interact with and influence one another?

Naomi Blohm: From a very basic standpoint, we'll keep it focused with agriculturals, the corn and the soybeans and wheat all work together because they can be used as feed substitutes. And a lot of times with one growing conditions affects, of course, the other growing conditions. And then it, of course, affects the overall supply for what is available in the county and then what can be available in the world. And then if you wanted to take that to the animal side of things, well of course, we saw in recent years when the corn price was so high, well hey, wheat is not so expensive. So, wheat then becomes the cheaper substitute that a lot of times is used. So, they always are always connected and one absolutely affects the other. 

Dan Hueber: The simplest way that happens is some are substitutes for each other. Corn, wheat, sorghum all, of course, have to be interrelated in price because they can be used as a feed source. Domestically we often don't even think of wheat as a feed product but you go to Europe that's very common. They produce wheat so they're going to feed wheat. So, they all have to keep a certain amount of relationship there and that does apply over to the soybean and soybean meal markets, again, because really the value of a soybean is the value of those products and, of course, it would be meal as a major protein source for the livestock industry as well as the food industry. Again, the profitability of each of those, in certain parts of the country there will always be a competition for where the acreage goes. So, absolutely, you can't really just study a commodity and feel that you have a handle on what's going to happen to the prices because it is always an interaction, an interplay between all of the various commodities that we can produce within a country. 

Sue Martin: If you look at corn and wheat, they're interchangeable. Coarse grains, they're part of coarse grains as well. Rice comes back, it's a major food in the world and then so is wheat, major food. Every country uses wheat and many countries use rice. So, when shortages show up, like for example, the rice supplies get very tight, corn supplies are getting tight, all of a sudden that shoves demand somewhere else, they've got to find another place to go, that would be wheat. So, you have to watch what is going on in all of those at the same time and that starts to build a case as to what you think is going to happen in that market. 

Darin Newsom: These relationships have changed basically since 2005, 2006, since computers took over the trade. You don't have those emotional ties, those psychological ties between markets anymore. Every market seems to be trading on its own. There are times, again, where they will be connected and one will influence the other. But the correlation and that relationship just isn't as tight as it used to be. 

John Roach: There's a definite interrelation. But markets really move on their own supply and demand. So, you have to be careful if you're buying corn because wheat is going up because corn has its own supply and demand and when wheat stops going up, corn will seek its own level. 

 

Tags: agriculture commodities education government markets news