Grains Fundamental Correlations

M

MrMuppet

Hi guys,

I'm trying to understand the grain market a little better and just by looking at the ladders each day I can see that corn is moving along wheat or vice versa, but Soybeans are sometimes completely unrelated and move along the US - Dollar, sometimes they move along the other grains or even lead.

As correlations are absolutely useless without a fundamental reason behind it, I wonder why the grains behave like they do.

As far as beans go, I understand that exports play a role and they compete with corn regarding acreage, so I rather expected them to trade a little more alongside corn....which is not the case.

Also I do not understand the relationship between wheat and corn...probably because wheat demand dynamics are completely different to corn and beans.

So I'd be really grateful if someone who has a little background in grain trading could shed a little light into this topic.

Please no arguments about statistical measurements like "the 180 day correlation between corn and wheat is just 45%". I know what I see on the ladders so the only thing I'm interested in is the fundamental driver.

Thanks a lot in advance.
 
Have you looked at corn/wheat and corn/soybeans intermarket native spread liquidity and volume ? Just a thought, but it might be one reason for wheat to move with corn if the intermarket spread trades volume.

Other than that, I don't see a fundamental reason for corn to be more correlated to wheat than soybeans. Soybeans main product is meal which is an animal feed like corn but not wheat( for the most part ), the 3 are grown on both hemispheres, corn competes with soybeans for acreage, some of soybeans by products are energy related( soyoil ) but so is corn with ethanol. Perhaps someone will give us an explanation...?
 
@TraDaToR actually I like your thought process here, haven't had that idea, so thank you.
Nevertheless, while spreading might be a reason for correlated orderflow, there has to be a reason for spreading in the first place.

Thing is, I simply could accept the facts and trade accordingly, but it gets problematic as soon as correlation falls appart and I don't know why.
 
I really don't know why there should be an intermarket spread except for the fact that traders have been trading it for decades. I don't see any fundamental reason for traders to spread wheat with corn, but I see it for soybean crush, spreads between different wheats... By the way, that's one of the reason I never traded that spread in 10 years in the ag markets. To me it's just 2 outrights...
 
Same for me here. The wheat/corn - spread is probably mostly traded by marketers who trade the spread instead of adjusting their elevator positions via two outrights. I'll investigate further, although there doesn't seem to be any underlying forces driving the spread...but I mean, when corn is bid, wheat is bid and for now, all that counts for me.
 
TraDaToR said:
Have you looked at corn/wheat and corn/soybeans intermarket native spread liquidity and volume ? Just a thought, but it might be one reason for wheat to move with corn if the intermarket spread trades volume.

Other than that, I don't see a fundamental reason for corn to be more correlated to wheat than soybeans. Soybeans main product is meal which is an animal feed like corn but not wheat( for the most part ), the 3 are grown on both hemispheres, corn competes with soybeans for acreage, some of soybeans by products are energy related( soyoil ) but so is corn with ethanol. Perhaps someone will give us an explanation...?
More...


I think it relates to the level of international trade.

No 1 in Corn exports is the US. The next largest exporter is only 1/2 US volume.

No 3 in Soybean exports. A distant third to Brazil and Argentina. Yet, we are the largest producer. Wth? You like soy? I don't like soy.

Tied for No 1 with Canada for Wheat.

The very different climates of these top producers make me wonder about the yield efficiency of simply alternating crops. And, it definitely brings up some very complicated demand/supply modeling issues.
 
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