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Manage Market Volatility Before It Occurs, Analyst Says
The equity markets have been in a strong uptrend for 15 months since the election results indicated a win for Donald Trump in November 2016. Setbacks along the way were few and far between, as historic gains were notched.
In November 2016, the low for the Mini Dow front month futures was 17,417 with the peak occurring in January of this year, reaching 26,684. This gain of 9,266 equated to an increase of 53%. There may have been someone out there forecasting this rally, but none that this author saw or read.
This move confirmed the theory that markets can and do move dramatically, usually more than anyone expects. In fact, to put emphasis on potential, the Mini Dow in March 2009 bottomed at 6,460 and began a historic bull market still intact nine years later, over a 300% increase.
Trying to relate equities to grains could be a stretch. Relating human behavior and the concept of chasing money (behavioral trends) is important, and it may provide insight into how market participants may behave when volatility returns to grain markets.
Currently, the general attitude in production agriculture is gloomy due to low prices and cash flow. Some believe that a strong price recovery in grains is akin to fictitious thinking. So was the idea of a historic stock market advance after the election of a new president.
Prior to the last three years, grain prices experienced ample volatility and pricing opportunities for over a decade. The saying that low prices cure low prices does have merit. An industry (such as the business of producing corn) can’t survive when producers, in general, are losing money, as most have in recent years. It is highly likely that, due to record demand both domestically and abroad, it is just a matter of time before volatility returns.
The point of this Perspective is that producers of grains, particularly corn, are now of the mind-set that it almost appears impossible to expect more than $4.00 per bushel. They have been conditioned that only small rallies can be expected, and growing corn is now a crop that is nearly bulletproof from adversity. This mind-set could be dangerous.
The volatility with stock prices plunging more than 13% over the last week suggests that when volatility moves back into the grain markets, those who are best prepared will be able to manage it and succeed through preparation.
A general concern is that producers will not create a balanced marketing approach. It is likely that many will aggressively sell a small rally, and then miss a bigger move.
What happens if you sell corn at $4.00 and it moves to $6.00? This could be costly both financially and emotionally.
The key to managing and embracing volatility is to prepare before it occurs. Talk to your advisor so you can implement the best tools for your operation to mitigate emotion and take advantage of market moves.
If you have questions or comments, contact Top Farmer at 1-800-TOPFARM, 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.
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