Grain and Livestock Markets Just Saw Another Crazy and Volatile Week, So What's Driving it All?

Volatility is the only consistent piece of commodity markets lately. Grain markets saw double digit gains and losses, and as analysts try to find a reason for why markets moved so much this week, there is no clear answer that rises to the top.

“I don't know that there is one single driving factor when it comes to the day-to-day volatility,” says Joe Vaclavik of Standard Grain. “We're in high priced markets. One thing that's interesting is that open interest and trading volumes are down. I don't know if traders are burned out, or if there's just a lack of interest in general. But that's a factor that has led to more volatility.”

Vaclavik says when you look at the fundamentals, the situation in Ukraine is still a factor in the markets, especially with the uncertainty surrounding if farmers in Ukraine will be able to plant. He says the questions about South America’s crop are also at play.

“Another thing that a lot of people are not talking about as much this year is acreage prospects here in the United States. There's a lot of crops that need acres, and there's a lot of crops that can afford to lose acres, but somebody is going to lose and it makes for a supportive situation, I think, overall until we know a little bit more about it,” Vaclavik adds.

Acreage Questions Still Unanswered 

There have been a wide range of acreage estimates leading up to USDA's March 31 Prospective Plantings report. Vaclavik says that’s a sign of just how much of a wildcard acreage could actually be this year.

“I don't think anybody has a clue,” he says. “I think the market is trading somewhere in the 90 to 92 million acre range for corn and slightly less than that for soybeans. But I there's always some sort of surprise in the acreage report. I think this year is going to be no exception."

The Drought Wildcard

The other factor weighing on acreage decisions is drought. Dry conditions are at a historic level. The U.S. drought monitor painting the picture, showing more than 60% of the contiguous U.S. is in some sort of drought, which is the most since 2012. That could hinder planting decisions, but it’s also impacting feed users in the West.

“I think drought is probably the absolute biggest driver in our market right now,” says Don Close, senior V.P. of Food and Ag Research, Animal Protein at Rabo AgriFinance. “Today, cow slaughter as a percent of federally inspected slaughter is running at 22%. If we go back and look in that 2012 to 2013 period, cow slaughter on an annual basis never exceeded 20% of federally inspected slaughter.”

So, just how tight will cattle numbers be this year? Close thinks it could be similar to what the cattle industry saw nearly eight years ago.

“After the liquidation of cows we've had for the past three years, we're setting up a structure that is incredibly similar to what we saw in 2014. We're just doing it on steroids this time. And I don't see any indications that that cow slaughter is going to slow down significantly. It will slow down some seasonally as green grass comes out, but for the year, I still think it's going to be incredibly large.”