Posted by: usset001 | September 17, 2013

Insights and old sayings on commodity markets

moneyiconI am teaching the course, Commodity Marketing, at the University of Minnesota this fall. We are currently learning how to read and build a balance sheet in grains. As I developed my lectures, I felt the need to write down and explain a number of old sayings and insights about supply and demand, markets and marketing. I share them with you.

Big crops get bigger: This saying comes from observing WASDE crop reports in our most productive years.  In big crop years, each crop report tends to show progressively higher yields, with a good shot for a yield kicker in the final report for the year.

The best cure for high prices is high prices: When prices get too high, they destroy demand and stimulate production, eventually leading to larger supplies and lower prices. The corollary also tends to hold true; the best cure for low prices is low prices.  Low prices stimulate demand and dampen the incentive to produce, eventually setting the stage for higher prices.

Bulls make money, bears make money, and hogs get slaughtered: Some things just speak for themselves.

July makes the corn crop, August makes the soybean crop: In the Corn Belt, the month of July is the most critical time for the development of the corn crop, while the month of August is more important to soybean development. We tend to believe that the productive fates of the corn and soybean crops, grown side-by-side in the Corn Belt, are tied together. In general this is true, but it is possible for the two to diverge. For example in 2003, a dry August had an inordinate impact on soybean yields (lowest in over a decade) while corn yields set a national record. Conversely, the drought of 1988 was harsh and early, hurting both crops, but the corn yields suffered more than soybeans.

Buy the rumor, sell the fact: Casual market observers are often puzzled by the price reaction after a big report. As an example, it is not uncommon for the release of a bullish report (e.g., the lowering of corn yields, or the raising of export projections) to be greeted with lower prices. Markets anticipate news. In the case of a market anticipating bullish news, prices may trend higher for weeks leading up to a report. Then the official report simply confirms the “rumor” (of lower yields, higher exports, etc.) and the market can trade lower due to unwinding positions, or the fact that the report may not have been as bullish as anticipated.

The trend is your friend: Good market traders respect price trends – higher or lower – and try not to take positions against a strong trend, despite their market opinion or bias. The most recent example is the wheat market, where analysts started to identify a bull story several months ago – but the market continues a long slow trend lower.

Short crops have long tails (aka supply driven bull market): Short crop/long tail describes the typical price pattern of a supply driven bull market. Supply driven markets are usually started by weather related problems during the growing season. Prices spike quickly as the market adapts to a new reality of smaller crops and supplies. Demand also responds to higher prices. Some demand cuts occur quickly, but the dampening pressure of higher prices on demand can stretch over a long period of time. After harvest and early in the new year, higher prices promote more planted acres and production, while demand is often slow to rebuild. Supply driven markets are generally volatile and shorter in duration – producers (sellers) should to be ready to act quickly to capture selling opportunities.

Demand driven bull market: Higher price trends based on strong demand tend to move slower and last longer. Strong demand gradually pulls prices higher as supplies tighten. Demand driven markets are generally less dramatic (i.e., less “spike”) than a supply driven market. The trend can endure for a longer time period – producers need patience when considering selling opportunities.

WAG: The typical commodity analyst uses many different statistical methods to deconstruct and assess the current state of supply and demand. The analysis methods will include an occasional wild ass guess, or “WAG.” They may even include the upgraded “SWAG”, better known as a scientific wild ass guess.

Plan your trades and trade your plan: Good advice for commodity trading, procurement and marketing. In fact, good advice for most aspects of life.


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