What is the lesson here?
After the frantic action in the stock market yesterday, I keep asking myself what lessons we should learn that would apply to grain markets. I was unaware of what was going on in the outside markets until I called KTIC to record my grain commentary about 3:30 P.M. yesterday afternoon. The reporter who does my interview told me about the volatility in the stock market and about how some elevators were not putting out bids until the markets opened this morning. Some were buying but only with huge price protection.
If your psychological makeup is like mine, at that point I got a sick feeling in my stomach. I felt panic, but there was nothing I could do. Years of experience told me that it was time to be cautious and not do anything that would later turn out to be foolish. After all, the incident did not take place in grains. Whether it would wash over into the agricultural markets was yet to be determined.
By Friday morning things had quieted down considerably. By mid-session, corn was down slightly and soybeans were slightly higher. The stock market was still down but not nearly as bad as the worst case on Thursday. Tension still exists concerning the financial situation in Europe. Any kind of disruption, caused in this case by an error in entering an order, can result in major emotional moves.
I suggest that there are some lessons to be learned from the experience of May 6, 2010. First is that I am glad that marketing is only a part of my business. While it may be an important part, production still takes precedence. I was not watching the grain markets all day yesterday because I was planting soybeans. The radio in my 1982 tractor does not allow the luxury of keeping current on markets during the trading day! Sometimes it is better to become aware of events after there has been time for the dust to settle.
Secondly, timing is everything when is comes to buying and selling. This is the time of year when most farmers should be selling grain. If you have already sold a big percent of your crop, seeing the market drop shouldn't bother you as it would if you are a speculator.
Thirdly, diversifying and selling in increments is a good risk management strategy. Those who follow that principle have probably not been overjoyed as prices have risen in the past few weeks. However, the sales which took place at higher levels in the last month look pretty good now. Trying to hit the top with one big sale is like trying to hit it big at the casino. Once in a while it may work. In general it is a recipe for financial disaster.
Have a plan and stay with it. Stop loss orders are for speculators. Preliminary observation is that some of the problems in the stock market Thursday afternoon were caused by stop loss orders being hit. A stop loss order becomes a market order after the order is hit. This means that the stock must be sold at whatever price is offered, even if it is ridiculously low. This can cause a cataclysmic drop in price if there are no buyers willing to bid. I never use stop loss order in grain futures, even when I speculate. I have seen instances of having the stop hit, only to experience a rebound after the position has been liquidated.