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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
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
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.
The point is, the market is never in equilibrium, it moves
like a pendulum swinging back and forth between one extreme to another extreme.
A self-reinforcing virtuous cycle is present during a bull market making stock
prices rise and making the economy stronger. A vicious cycle is called a bear
market, and it makes the economy and stocks weaker.
Understanding how the market works can help direct our
investments and planning. When markets move to one extreme (like the 2012
commodity highs), we can bet on the reversal. Tools like charts and historical
data give us most of the information we need to make sound decisions, along
with understanding current supply and demand fundamentals, in addition to
general macro economic conditions. With those pieces of information, we can
anticipate just where in the pendulum we are swinging.
Market Scenario Planning(sm) is a service of Stewart-Peterson
Inc. The data contained herein is believed to be drawn from
reliable sources but cannot be guaranteed. This material has been prepared by a
sales or trading employee or agent of Stewart-Peterson and is, or is in the
nature of, promoting the use of marketing tools, including futures and options.
Any decisions you may make to buy, sell or hold a futures or options position
on such research are entirely your own and not in any way deemed to be endorsed
by or attributed to Stewart-Peterson. Commodity trading may not be suitable for
all recipients of this report. Futures trading involves risk of loss and should
be carefully considered before investing. Past performance may not be indicative of future results. Copyright 2013
Stewart-Peterson Inc. All rights reserved.