On Wednesday 16, 2016 I was fortunate to share a stage with Daniel Hofstad of Cargill, Doug Prohaska of FC Stone and Kevin Shriver of Land O’Lakes for a panel discussing risk management in the world of agriculture and commodities at the Oil and Grain Trade Summit in Minneapolis. Several topics were touched upon, but the most interesting was looking forward to the next year. Given that the election was fresh in everyone’s minds, we discussed the potential impacts of a Trump presidency on a number of free trade agreements and their effect on the agricultural import and export markets. Given that the US is the world’s largest exporter of corn and soybeans, this topic has become increasingly pertinent.
Several questions presented to the panel touched upon the topic of speculation and how it was possible to capitalize on spec fund driven futures movements. Doug made several nuanced points regarding the difference between algorithmic HFT firms and non-HFT traders and their separate impacts on the market. I gave the example of the CME’s cattle contract which has come under scrutiny recently around concerns about speculators causing volatility in the markets. I mentioned that much work had been done on the contract specs recently such as a settling the contract to a cow 50 pounds heavier in order to allay concerns and pressure points. I pointed out that in nearly all markets, bona fide hedgers make up a minority of trades (something, we call internally the ‘speculative multiplier’) and that the focus on speculators tends to be during short periods of dislocations. I noted that the key in any market is balance and on aggregate derivative markets add stability, as can be demonstrated by looking at the onion market before and after the contract was forcibly delisted in 1958 by the Onion Futures Act.
The panels also noted that there has been an increasing interest in commodities. Typically, the final quarter of the year has marked the moment when commodity markets have seen large outflows of funds. However, this year comes on the back of a more bullish backdrop, with inflows into commodity investments during the first nine months of the year setting new records at $54 bn, according to Barclays.
Question on regulations also highlighted the discussion. I noted some of the excellent work that the CFTC has done in supplementing what is considered a bona fide hedge which is giving greater flexibility to the hedging community. In addition, FASB has proposed new changes to hedge accounting standards which should simplify the accounting of hedging. However, I noted the fact that although regulation for a specific topic may be beneficial, taken on aggregate the net effect may be harmful to the public and customers. Regulation creates additional barriers to entry which dissuades competition that would optimize the available service for customers. As such, although the individual brick placed by regulators may be positive in and of itself, the wall that is created may be harmful by preventing competition. Many in the industry point to the fact that as of September 31, 2016, 68 FCMs are listed, down from 72 from the start of the year. The net result is fewer people to trade with.
The panel ended with a discussion on the most exciting aspects of risk management space going forward. I mentioned that one of the common threads through the conference had been a focus on change. As a company, Seed is focused on providing the new infrastructure and risk mitigation tools for the rapidly agricultural sector. In a past blog, I noted that there is a very weak correlation between conventional crops (on which derivative contracts are based) and their organic counterparts. Seed will provide organic derivative contracts to allow participants in these markets to effectively hedge. Speakers highlighted the growing size of the organic market, with retail sales of organics increasing $3.6 billion in 1997 growing to $43.3 billion in 2016.
A particularly interesting part of the conference was the growth in non-GMO with new major entrants including Sun Opta, Del Monte and Danone. Several speakers spoke about the fact that demand could cause a big divergence in non-GMO and GMO prices. 72 countries currently do not allow GMO crops and it will be interesting to observe further regulatory shifts.
I left the conference invigorated by the superb set of presenters and excited by Seed’s position in this evolving eco-system.