You are here
Grain Marketing Decisions Using Perception, Price Movement, and Balance
Two widely used types of market analysis are fundamental and technical.
Fundamental analysis argues that supply and demand factors determine price. Technical analysts argue that price charts provide information to steer trading decisions, and thus prices. Technicians would suggest that supply and demand variables are already factored into prices and, therefore, charts can more accurately determine future price movement. Both may be correct, and both may be wrong.
Others may argue that you should use both when determining your next decision. From the perspective of a farmer, it may be helpful to use both.
Knowing that corn acres are down for the second consecutive year and that the world’s stock-to-usage figure is the second lowest in 24 years would fundamentally suggest corn prices may be undervalued and have room to work higher. Yet, technicians might argue that charts show overhead resistance near $4.25, and until prices break above this level, you should consider being a seller. Both have their place, and both will be vehemently defended by their users. However, there may be a more intuitive sense of how markets trade that is perceptive in nature. That is, the markets have a tendency to trade on perception, often neglecting or overriding fundamental and technical analysis.
The old saying that perception is reality may have a place, on occasion, when market volatility increases. As farmers plant grain in spring, there is no way (with any level of certainty) to anticipate what the final yield will be at harvest. Educated guesses on supply (while often accurate) are predicated on near-ideal variables. Consequently, they help to narrow down a range of expectations for crop production. Yet, the most dominant variable of crop production by at least a fivefold accountability factor (if not tenfold) is weather. As weather unfolds, so often does price direction. However, the futures market is often far ahead of actual weather, as it moves on the perception of weather developments. As an example, when a dry weather pattern is developing and forecasters call for the potential of continued dry weather, prices will often accelerate upward. Note that future dry weather hasn’t actually occurred; only a forecast exists. That is often why prices can violently change and often crash when weather markets occur. The perception of declining supply can quickly change to increasing supply.
The key to recognizing that markets move on perception is to recognize that, as logical people, we have a tendency to wait for enough information to make decisions. Those who are willing to make decisions in front of limited information, and more on hunches or perception, have a tendency to either be very right or very wrong. In the case of trading or marketing, those who anticipate weather changes may be well rewarded. As an example, if you’re a corn producer and you sell in the winter months anticipating normal weather for the growing season and lower prices by fall, you may be rewarded. If weather is less than ideal, you may regret early sales. A balanced marketing approach could include selling corn early (anticipating lower prices on good weather), and purchasing a call option (in essence, an insurance contract against higher futures prices/adverse weather). You now are well positioned regardless of which way the market moves. Feed buyers may buy grain as needed, and also purchase a call option to shift future risk in case adverse weather develops.
The key to a balanced approach is to recognize that when markets move on weather, they tend to do so in a short window. In 2012, corn prices bottomed in mid-June and peaked in mid-August as dry weather developed, in a range of well over $3.00. Conditions turned from generally dry to more dry, followed by forecasts calling for lack of rain. Technicians and fundamentalists had reason to buy. As volatility picked up and perceptions of the crop size decreased, prices accelerated upward. If you waited to buy a call to balance your marketing, you probably didn’t get your calls bought. The point is to buy these before the market perception changes. 2018 is beginning to look a lot like other years, where dry weather existed early. Consider buying your calls now!
You wear a lot of hats as a producer. One is to produce the best crop possible and the other is to be the best marketer as possible. A good marketer understands that trying to outguess price movement is challenging; time is better spent preparing for market movements and creating a balanced approach to marketing.
If you have questions or comments, contact Top Farmer at 1-800-TOP-FARM, ext 129.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
Front Desk Administrative Assistant | Stewart-Peterson
Office: 800.334.9779 | Fax: 262.334.6225
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Hypothetical performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Reproduction of this information without prior written permission is prohibited. This material has been prepared by a sales or trading employee or agent of Stewart-Peterson and is, or is in the nature of, a solicitation. 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. Stewart-Peterson refers to Stewart-Peterson Group Inc. and Stewart-Peterson Inc. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with both companies. Accordingly this email is sent on behalf of the company or companies providing the services discussed in the email.