Trading the Market You Have, Not the Market You Want

Posted on 03/09/2017 10:24 AM

'Tis the season for price predictions! You really have to love this time of year, because it goes to show that no matter how many times a prediction has been wrong, or how little we really know when it comes to where the market will head folks still clamor to be the first to predict price.

Of course we all know the old adages, "A broke clock is right twice a day," "A blind squirrel finds a nut." But that doesn't stop us from talking about these predictions and if they suit our position we of course find ourselves grabbing hold and taking them as gospel.

Gather around folks, I mean really come here and get close because I have a secret to tell you. It might not be popular, and I'm definitely not saying it to burst your bubble, but when it comes down to price predictions-wait for it----no one knows!

That's right, we can all think we know exactly what the market is going to do, but just like you never see a psychic win the lottery those that know, honest to God, full out, no question about it KNOW where the market is going to trade definitely aren't writing columns, or traveling to speaking engagements to talk about it (me included!).

We as humans are intrinsically lazy, so if someone truly had an idea on where any given market was headed they'd get up, spend 37 seconds putting the proper position on and spend the rest of their time doing whatever they felt like.

Now before you start firing up those email machines to send me hate mail, or think that I'm writing this column clutching my cats, bitter the attention is shining elsewhere let's take a look at the things we actually do know and what they might mean for market direction as we move ahead.

First things first, yes weather will be huge this year. Huge. It always is. Weather is the only thing that has the potential to take what are thought to be known and turn them into huge unknowns. Weather is also the only thing that can trump a higher dollar, lower exports, poor demand outlook and a general feel of global economic failure.

If the weather goes wonky, the markets will indeed also go wonky. And while I will hop on the bus the rest of the folks who believe El Nino is breaking down are riding, I'm not so sure we can guarantee a rapid transition to La Nina as would be needed to see a significant change in weather patterns-at least early enough to cause the production issues needed to cause a rally similar to ones being discussed.

And yes, I realize I'm not meteorologist, believe me, I know. But when I start thinking about people placing a good portion of their risk management on black and hoping for a developing weather issue I break out into cold sweats. So let's take a look at what we know going into the new crop year and what that could mean for your marketing plan as we move forward.

Let's hop into our time machine for a minute and go back to the winter of 2012. From an economic standpoint the US was continuing on its path to recovery after the struggles of 2009, 10 and 11. Globally China was firing on all cylinders, continuing to prepare for their Olympics that summer. Crude oil was still trading solidly above $100 dollars a barrel as ideas of a global recovery and supply disruptions kept buyers active.

People loved commodities early in 2012, they were tangible, you could hold them and even when the prices of houses had come crashing down the idea that booming population growth and new money flow would keep demand increases constant was enough to keep speculators playing the game.

On the supply and demand side of things the global market wasn't dealing with the stocks of 2016. Global corn ending stocks for the year were forecast to come in at 128 million metric tonnes, some 80 million metric tonnes (3.2 billion bushels) lower than what is currently being estimated for the 2015/16 crop year. Soybean ending stocks were expected to come in 16 mmt lower (582 million bushels) than current 15/16 crop year projections, while wheat ending stocks were projected to come in 22 mmt (787 mbu)lower as well.

Brazil wasn't considered a "major exporter" of corn by the USDA since incentives to produce the extra 20 million metric tonnes of corn (787 mbu) they're producing today hadn't showed up yet. At the same time Chinese production was 32.5 mmt lower (1.28 billion bushels) than seen in the most recent USDA projections.

So why am I telling you all of these things? Believe me, it's not because I'm trying to make you sad. The last thing I want to do is make you sad. My goal is to be realistic and help you take a realistic approach to marketing. To do this I have to point out just how different the market structure is versus the last time we saw a significant weather issue. It seems nearly once a week someone asks me what will happen if we see a repeat of 2012 weather issues, only to seem put out and angry with me when I tell them the difference in market structure this year versus then and it's significant.

That takes us right back to the question that's guaranteed to come next, so what do you do?

You do the things we've talked about before. First step know where you're at from a profit and loss standpoint. If you don't know where you're profitable you will never be able to realize when the market is giving you an opportunity. Many times I see guys unsure about where their point of profitability is, this uncertainty only further adds emotion to their marketing-when the price drops they swear they're losing the farm, and when the price rallies their cost of production seems to increase step by step with the market as well. This lack of understanding causes further confusion, with this confusion causing greater angst.

Secondly have a plan (yes, I know I've said this before). A lack of planning produces poor performance, it really does. If you don't know where you're profitable, what you need to do on the movement side and what your cash flow looks like how can you expect to have peace of mind and a solid, profitable business as we move ahead in uncertain times?

Lastly, educate yourself on the market opportunities out there when it comes to capturing upside potential. There are ways you can sell your cash grain at a decently profitable level, but also satisfy that bullish side of you that asks "What if?" Talk to someone you trust, don't be afraid to ask questions and remember if you do end up spending some money on upside price protection, understand it's an insurance policy not a guarantee.

I fully believe one thing can be guaranteed this year and that is the market will give you a chance to market at reasonably solid levels. There will be an opportunity; the big question is whether or not you will be in a position to take advantage of it when it shows up.

As always, don't be afraid to contact myself or Pro Farmer with any questions. Until next time, stay safe and happy marketing.

You can find Angie on Twitter at @GoddessofGrain or email her.

 

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