The swinging pendulum
As promised in an earlier writing, in the coming months we will break down possible scenarios regarding outside market influences that can drastically affect the price of commodity futures -- things other than general supply-and-demand factors.
By looking at and understanding how these outside market factors can shape and influence the price of grains or livestock, you can ultimately assist your own awareness in long-term scenario planning, which ultimately leads to your successful commodity pricing.
You have to think about the possibilities so you are not blindsided by unexpected market moves. It takes strategic thinking, like an expert chess player who plans two or three moves ahead.
Talking about all the possibilities that can unfold around you is what advisers at Stewart-Peterson call "market scenario planning." It is a process where the different scenarios are considered. This allows producers to prepare risk-management strategies for multiple price scenarios and helps them determine which strategies will yield the best price by using an assortment of risk-management tools, such as put and call options and forward contracting.
You have to be ready for anything, know what you're going to do if the market moves higher or lower, and you have to use the right tool at the right time.
Looking at our world today, economic forecasters and media pundits always stress the doom and gloom during economic contractions. Economies move through natural cycles of growth and retraction. These economic cycles occur globally, nationally, and locally.
Economies and political views move in pendulum swings. Everybody leans one way, and then when that belief gets to be viewed as too extreme, everybody switches positions and starts to lean the other way. When the pendulum begins to move from side to side, the swings can be fast or slow – just like unpredictable commodity price action. We're talking about high commodity prices and low commodity prices as we have seen throughout history. If you're on the wrong side of this swing, you can get crushed. If you're on the right side, you can ride it to glorious opportunities.
The U.S. economy has taken a round trip. The boom of the early 2000s, followed by the bust; with an economic recovery which now seems to be shaky, not only in the U.S., but globally. After years of economic decline, we're getting back to some equilibrium.
Think about the DOW and how it rode the victorious wave up to over 14,000 points, and now feels it is ready to decline. Is it time to move your money? Will another real estate or land bubble occur? Most likely, yes -- a second recession is likely in the years ahead.
As well, interest rates have been low for so long, that soon, they will begin to climb; be sure to lock in long-term rates now.