Supply volatility – how markets react


When supply volatility hits the market, contracts that were signed in advance of the onset of the volatility tend to be lower in price than the spot market. That is because spot deals include a premium for risk mitigation by sellers, even as contracts continue to reflect a time before supply uncertainty. Of course as time passes, contracts end and new contracts are signed, including the new price increases.

These price increases often bring about an increase in demand volatility as companies finish their stocks and opt to buy smaller volumes in anticipation of a future price decrease. As demand becomes more uncertain we enter a buyer’s market, in which spot buyers are advantaged in their negotiating power. In these times, spot buyers are often able to fetch lower prices than even contract buyers.

Understanding this interesting inflection point, in which prices begin to trend downward, is critical to understanding market behaviour. And understanding market behaviour is critical to making the market work in your favour. This is where our co-operation with Glowlit can help our feed producer readers. By benchmarking just a single price on Glowlit, you gain access to a set of notifications for that product designed to alert you to changes in the market.

The most significant market trends identified by Glowlit in the last week:
Amino Acids Are Taking a Turn

As corn and soy prices continue to rise we’d expect to see a similar trend for amino acids. Low to non-existent stock levels at the end of the supply chain, along with a series of planned maintenance shutdowns in factories around the world, would normally strengthen that trend even further. However, a quick glance at the data of a few selected amino acids reveals a different story.

Global prices are stabilizing and, in many regions around the world, prices are already declining. How does this happen? Producers first send lower price offers to their largest customers in hopes of securing large sales before the market further declines. These buyers negotiate prices, and send word to their contacts throughout the supply chain of a market shift.

As rumours of falling prices spread, traders and buyers that had been waiting for the downward shift in the market begin testing the market by negotiating larger volumes. Their apprehension to buy too much, too soon, amidst a market that may still decline further, results in a game of chicken in which two players battle over who will yield last. Producers with full warehouses are up against buyers and traders with empty lots.

The question becomes: which one will flinch first?

 

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