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Bullish, bearish or both?

By Jon Scheve, Superior Feed Ingredients, LLC

There are several reasons why someone could be bullish or bearish today. Understanding marketplace variables that could affect prices can be helpful when developing a grain marketing strategies. Following are some recent variables that could potentially impact the market.

 

Reasons to be bullish

  • Parts of the Corn Belt are a little too dry and others are a little too wet.
  • Sorghum appears to have been removed from China’s no trade list.
  • There are rumors China will be buying more ag products from the U.S. Many think it will be corn, DDG, and ethanol.
  • Wheat prices have been increasing.
  • Globally, and especially Brazil, corn growing areas outside of the US are dry.
  • Potential ethanol sales to China, as part of recent trade talks, could encourage more corn usage.
  • Corn trendline yields would mean the lowest carryout in several years.
  • Weather forecasts indicate a hot and dry June.

 

Reasons to be bearish

  • Planting pace is nearly perfect, which may mean more corn acres.
  • There are many trade unknowns involving NAFTA.
  • There is no guarantee that China will actually buy all of the grain in the new trade agreement being discussed.
  • Trade talks are constantly changing, so there is no guarantee of anything.
  • The 2017 carryout is still sizable.
  • July and August forecasts are indicating normal weather.

 

How biases can affect grain marketing plans

Over the summer social media will be flooded with crop pictures from farmers. Usually, the most extreme pictures (i.e. crops under stress) are shared more frequently, while healthy crop pictures are posted much less often. I think this stems, at least in part, from farmers’ natural market position. They want prices to go up and they look for any reason to justify why it should happen.

When I ask most farmers to predict their final average yield before harvest, they give me a very conservative estimate. I don’t know if they are protecting themselves from the worst, or just want to be surprised with positive results — probably a bit of both is what I suspect.

On the flip side, when I ask end users to estimate where they think prices will go, they usually say why prices are near the top and should start going lower. Rarely do they say prices will rally significantly from current levels. Since they need to buy grain daily, their estimates likely mirror their hopes, just like farmers on the other side.

Last summer when crops looked questionable, the farmers with the least sold were the most vocal, saying $4.50 to $5 was likely. Then in August when the USDA report revealed the crop may have been underestimated and prices went down, answers shifted. While farmers said the USDA had to be wrong, end users said that corn would likely drop to $3.25 or even $3. In the end, neither were correct, as prices stayed sideways.

Nearly everyone has biases because psychologically people want to defend their decisions. It’s not wrong to have these biases. They help anyone make a decision. It’s why there is a market and the cause for movement up or down on any given day.

As I wrote above there are many reasons why the market could go up, there also are many reasons it could also go down. It’s easy for farmers to stay focused on the reasons the market has to go up, because that’s what they need. But by doing this it could blind them to valid reasons the market could go down.

I’ve already seen the cycle continue this year. One analyst recently told farmers to protect their downsides by buying puts, because the market may not rally siting some of the reasons I detailed above. Then the very next day a different analyst told farmers the market is going to rally to $5 siting some of the above examples as well, so they should be buying calls on anything that have already sold.

This kind of flip-flop advice can be very confusing for farmers. Many, but not all, of these analysts are brokers at brokerage companies. Rather than make money when their farmer clients make money, they make their money when clients make trades. To be clear, I’m not saying that these analysts don’t have good intentions. I’m sure all of them do, and obviously they would lose clients if they were never right. But it’s important to remember their goals and objectives might not always align with farmers. This is why a farmer should always look at all possible outcomes of any trade before taking a course of action for their farm.

Some farmers may only follow the advice of whoever is saying what they want to hear at the time. That can lead to confirmation bias, which can be misguided. Instead I prefer to follow only a couple of analysts. By doing this, I can better see shifts in market dynamics that I should take into consideration. For instance, if an analyst has been bearish and shifts bullish, there may be an opportunity I should consider for my marketing plan. I find this strategy helps prevents information overload or analysis paralysis.

I also think it’s important to listen to the insights of analysts I generally disagree with too. As a farmer I naturally have a bias that markets should go higher. So, to maintain perspective it’s important to hear what those saying why that may not happen. Listening doesn’t mean I have to take their advice but hearing alternative interpretations to market variables can keep my biases in check and help me maintain a well-balanced marketing plan.

These biases certainly are not limited to just analysts, it could be another farmer, friend, grain buyer, banker or broker. Biases aren’t inherently bad and it’s unrealistic to never have them. After all, when I choose to sell or not sell I make that decision based upon the beliefs or information I have of where the market is going. The trick is to be open-minded to market scenarios that may not align with what I want to happen and to question those whose advice I take.

The next time someone tells you the market has to move a certain direction, ask them what their position is. If it’s a farmer friend with nothing sold and they say the market is going to $5, be wary. They might be a little biased.

 

Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at jon@superiorfeed.com.

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