Making Lemonade from Lemons: Commodities, the Shutdown & Business Agility

One of the dozens of segments of the economy affected by the US government shutdown was commodities trading. Under normal circumstances the U.S. Department of Agriculture (USDA) continuously surveys data about farm production, crop yields, international trade, and short- and long-term climate predictions to supply daily, weekly and monthly reports that form the basis of pricing all commodities, from cattle to cotton to corn. Commodity traders build their own proprietary models based on the USDA data, which is regarded as the most trustworthy source of such information, as they try one-up their competitors in the futures markets. All of this happens under the watchful eye of the Commodities Futures Trading Commission (CFTC) to assure fair and stable markets.

When the U.S. government shut down in October, the USDA and CFTC ceased to operate, but the markets they serve stayed open. People were still free to trade goods but they were flying blind with regard to how to settle on a price. Absent a rare major market shock event, commodity prices don’t move around suddenly and violently, but they do move continuously, so the more the data aged, the greater the risk to trading. And without a functioning CFTC, there was no active oversight to keep anyone with the power to manipulate the market from doing so. The only incentive for market stability was the knowledge that the CFTC would eventually be back online, and there would be a paper trail of who did what and when.

Of course, any vacuum will be filled with something. In this case, counterparties began sourcing 3rd party non-government data to simulate the data they used to get from the USDA. For the companies supplying this data, the US government shutdown created an immediate business opportunity. In the short run, they could sell their data to anyone trying to establish a clearer pricing picture, and in the long run they are in position to win new clients who see their offering as a good secondary source of decision making data.

Similarly, the financial firms that best managed trading risk by adjusting their models to adapt quickly to new data feeds and sources had the best opportunity for trading profits during this period of uncertainty. Most without this agility simply chose to exit the markets and sit on the sidelines. Too much risk.

This is just one recent and vivid example of the value of being an agile business, ready to move when opportunities arise. Those that have the people and systems in place to make quick and accurate decisions when an unforeseen market disruption occurs are usually the market winners.