World Grain - September 2014 - 8

FROM THE EDITOR-IN-CHIEF

Benefit from new
electronic age
obert Shiller, winner of the Nobel
Prize in economics, famously declared,
"There is no way to predict the future."
He made that statement in cautioning investors in stocks against believing that the current business cycle is different from the past,
while pointing out that people are much too
eager to believe that the present differs from
what occurred before. One of the main reasons that investors think that it is possible to
disregard prior experience while relying on
the superiority of present knowledge has as
much to do with grain and other commodity markets as it affects trading strategies
in securities. That supposition stems from
modern communications offering access to
information and data that were difﬁcult, even
impossible, to ﬁnd in the past.
Many recent market-related events have
shown that no matter how perfect information resources may have become and regardless of how large and efﬁcient data bases are,
the task of forecasting prices, much less any
part of governing supply-demand equations,
is nigh on to impossible. The devastating impact of drought on the hard red winter wheat
crop in America's southern Plains states
comprises an unpredicted occurrence in the
same way that no one expected the RussiaUkraine crisis to be translated into a possible
limit on Black Sea wheat exports.
While weather and international turmoil
lead the list of surprises that few observers forecast, it is important in this context to
note that both futures and cash grain markets
have provided adequate protection for market
participants following a cautious course in
hedging. Indeed, some commentators consider that futures markets have gotten ahead
of the actual reality of still large global supplies of wheat and corn. Instead of adhering
to the frequently bullish interpretations of
global supply-demand, this questioning viewpoint relies in the case of wheat on high U.S.
prices sharply curtailing foreign demand and
shifting livestock feeders away from wheat.
Hardly anything underscores the surprises in
the current situation better than the expanded
ﬂow of Canadian wheat to U.S. mills. Canadian wheat imports had climbed to new record

totals in recent seasons. The prospect for this
year falls short as Canada's 2014 crop lagged.
There's hardly a better afﬁrmation of Professor Shiller's warning than what two major
international trading companies revealed about
their operations in a recent quarter where miscalculations led to large losses. While these
were certainly not the ﬁrst losses that major
international traders have sustained, including
instances of trading losses forcing companies
to exit the grain business, they were sizable
enough and unique enough to cause a shock.
One of these losses did not occur in grain, and
was explained as follows: "Earnings were
trimmed by a trading loss related to an unprecedented price spike in U.S. power markets."
Also contributing to this company's setback were non-trading developments focused on grain, such as China's rejection of
corn imports and rail service disruptions. Yet
another company said, "Results in the quarter were primarily impacted by losses in our
grain trading." It further noted, "Our commercial and risk management strategies anticipated lower grain prices." Instead, prices
rose, pressuring margins.
No one may say that utilizing of presentday information resources would have prevented either of these problems. Yet, it is
happenings like these that have been part of
grain industry history for generations that one
might hope would be alleviated or even prevented. Such systems are not only designed
to inform when danger looms but to provide
a point for taking action to change both position and strategy commitments that accommodate or avoid these risks. In a time when
companies are putting together systems that
identify future risks related to weather, crop
prospects, national instability and conditions
affecting consumption, these new approaches
could help all parts of the industry. That these
resources and these systems are available
now represents a huge plus for businesses like
grain. No industry should beneﬁt more than
grain from this new age of electronic communication and data sourcing.
Morton I. Sosland
Editor-in-chief

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WORLD GRAIN (ISSN 0745-8991) Volume 32, issue 9,
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World Grain - September 2014

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