The News & What it Means – What the BDI is Saying about the Global Economy & Important Factors to Consider Amid the Steep Decline in Spring Wheat Futures

By John DePutter & Dave Milne – September 13, 2017

 

The news:

“The Baltic Dry Index has seen some strength over the past two months, rising to its highest levels in nearly three years.”

– CNS Canada, Sept. 12, 2017

 

What it means:

The global economy is picking up.

 

Admittedly, the BDI may not be the first indicator analysts might look at to assess the general health of the world’s economic situation, but it is a useful tool nonetheless.

 

Compiled by the London-based Baltic Exchange, the BDI provides a measure of the price of moving major raw materials by sea. As such, a rising BDI suggests increased demand for shipping capacity, which means more commodities are being bought and sold on the international market – a signal that buyers, whether it be individuals, companies or countries, are active and have money to spend on raw materials.

 

It’s no secret: When people have money, the world goes around.

 

Good times to economic crisis

Flash back to 2007 and early 2008, when commodity prices, including grains and oilseeds, were flying high and hitting all-time peaks in some cases. Stock markets and economies were booming, particularly China’s. Amid all those roaring good times, the BDI reached its record high of 11,793 points in the spring of 2008.

 

We all remember what happened next: The global economic crisis arrived and the bottom fell out. With demand drying up, the BDI plunged to just 663 points by December, 2008.

 

Remaining under pressure, the BDI eventually bottomed out at 290 points earlier this year in the wake of too many ships – many of which came into service during the good times – and flagging global demand for iron ore.

 

Bouncing back

Since then, however, a reduction in the number of ships and rebounding iron ore demand from China has the BDI moving north again.

 

Things are better in Canada and the U.S. as well, as evidenced by recent central bank moves to increase key overnight lending rates amid strengthening domestic economies.

 

Downside too

Mind you, there is a downside to this too: Higher shipping costs tend to get shunted down the line to the farm gate.

 

Action plan:

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The news:

“Spring wheat futures see more pressure as harvest rolls on.”

– Farm & Ranch Guide

 

What it means:

Amid the market decline, there’s some important lessons to be learned here.

 

Lots of talk about a cliff-drop in Minneapolis spring wheat futures market these days. This isn’t the only news story on the subject.

 

The story lists several reasons for the decline. Here are three:

 

  1. 1. Traders unwinding their spreads from mid-summer when they were long Minneapolis against short KC and Chicago wheat.
  2.  

  3. 2. Near record yields of later harvested hard red spring wheat in parts of northeastern North Dakota and northwest Minnesota, along with parts of Canada showing better than expected yields.
  4.  

  5. 3. World markets reeling from the size of the harvest coming from the Black Sea region.

 

What’s important to farmers:

Those reasons make interesting reading but digging a little deeper there are a couple of key points to take home as we consider the implications of the steep decline in the market the past two months.

 

One is that when weather markets are hyped up with news coverage and drought woes, that’s usually a great time to do some selling. Drought-driven markets usually overplay the upside during such times, setting up for an eventual downfall. When the news is splashed all over the media and talk of drought damage is front and centre, that’s when a market is becoming vulnerable to swing the other way.

 

Another key point is that the opposite can occur in the aftermath of a drought market. Often, you’ll see a deep dive that takes the market farther than what might be considered fundamentally justified.

 

Action plan:

Find out whether the DePutter team thinks the current downfall in wheat futures is over. Click here for our latest reports.
 

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