The last month has brought the gladiators to the center of the arena and the flood lights are on. Excuse the pun! Apparently, flooding and delayed planting are creating our first weather rally of the year.
The issue I want to focus on is the apparent conflict between the recent recommendations of most marketing advisors to lock in prices in anticipation of a large 2013 crop versus the market rally in corn and beans. Most advisors are scrambling to try to figure out what is happening. The answer is very simple. The market is trading a set of anticipated fundamentals which are different from the fundamentals which are being widely discussed in public forum. Pure and simple.
Let there be no doubt. As an economist, I believe fundamentals WILL determine the final cash market price in a free market. The question is where and when the “final” cash price will be determined. Sale of one particular unit of commodity occurs at a time specific, but the price can be set over a long period of time with various available pricing contracts. Thus, the market for a commodity is a continuous process rather than a finite action.
Why do fundamental approaches miss the point like they have in the last month? Again, plain and simple. Projecting future prices requires assumptions which can vary widely depending on who is making the assumptions. In the last few days, I have heard estimates for planted corn acres all the way from the USDA estimate of 97.3 million acres to less than 94 million acres, and some mumbling about numbers lower than that. I have also heard estimates that yield will be down 5-15 percent from original estimates. Taking the extremes, we could be projecting production decrease of 2.5 billion bushels, and USDA’s estimated carryover is only 2.0 billion. Something would have to give.
It doesn’t take anything near a 2.5 billion bushel reduction to cause a major adjustment on the demand side,. It is not just about estimating planted acres. It is about trying to estimate the impact on all components of demand (domestic and globally) as well. There is more than ample opportunity for guessing and speculation. The futures markets are the venue where everyone can express their opinion by placing a bid. For every accepted bid, someone else thought the offer was wrong and took the opposite position.
At the end of the day, the futures markets reflect all of the guessing, projecting, and speculation. There are technical analysis approaches which also attempt to anticipate what the markets will do, but attempting to predict the future is highly speculative regardless of how you do it. The group of technical indicators that are the most useful in these cases are those which follow trends rather than try to predict the future.
Quantitative trend indicators confirm what the market is doing right now rather than try to project where we will be at some point out in the future. It sound trite, but if there are more buyers than sellers when the market opens tomorrow, the price will be bid up. We have been conditioned to try to “know” what the price will be so we “know” what price to lock in. In most cases, that is an illusion and false sense of security at best. Projections of future prices must be taken at face value. They are based on a set of assumed conditions which can change very rapidly without being reported in any public forum. In fact, the actual underlying fundamentals can change and not appear in public forum. Witness the current deterioration of the 2013 crop.
Futures prices reflect trading based on the known and speculated assumptions, and they are available continuously. The simple MA(5,35) system we have been working with flashed signals last week that the corn and bean markets were trading something different than the opinion of most marketing advisors. There is a HUGE difference between trying to make price risk management decision based on what you think prices will be in the future and what you know is happening right now.
Technical analysis isn’t for everyone, but glaring “flood” lights of the last couple of weeks have certainly pointed out the weakness of a fundamental approach and the strength of a technical approach to price risk management.
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Posted by Keith D. Rogers on 2 June 2013.