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Market Insider: The Agriculture Marketing Year In Review
By BRIAN HOOPS
Yankton
As we exit 2008 and look back at this marketing year, ask yourself what have we learned? After all, the last 12 months will undoubtedly be remembered as one of the most memorable marketing seasons in history. Producers
had the opportunity to sell $7.50 corn, $16.00 soybeans, and $20.00 wheat; while some took advantage of these incredible prices, there are others who are only able to look back and wonder about what might have been in 2008.
While prices were moving sharply higher in March through June, most producers and analysts were bullish and projecting higher prices still. The fact that December corn and November soybeans both reached the all time highest price levels in history did not jump start the majority of producers into becoming proactive and locking in enormous profits as they believed that the downside risk was minimal and there was no reason to do any marketing as the opportunity for $7.00 corn and $16.00 soybeans would always be available.
Well, what have we learned? First of all, people are always bullish at the highs of the market and bearish on the lows. Using the sentiment index that measures bullish and bearish readings on a scale of 0 to 100, with 0 being the most bearish and 100 being the most bullish, from January through June corn had a reading of over 90. This implies that during the majority of time that producers should have been actively doing marketing, the masses were bullish and didn’t do anything. Contract the bullish reading with this week’s 6 reading for corn.
The low reading implies the masses are extremely bearish and corn may be ready for a small rally. We know that the fundamentals are generally bearish, but the technical action; maybe telling us the winter lows may be in for a while. In soybeans, a similar bullish reading of 90 was seen from January through June and currently stands at 6.
Secondly, strategy will always outperform outlook. No matter who is providing the outlook, we are all human and thus capable of making errors in judgment. In this business, someone who is correct even half the time, is likely doing a good job. But is a 50-50 track record good enough? If you are a producer of corn, soybeans, or wheat, you can’t afford to be right only half the time. You must protect your business and minimize your risk by transferring that risk to someone else.
More than anything, producers should have learned this lesson this year. No matter what their outlook was this year, buying put options for corn, soybeans and wheat would have effectively locked in a worst case scenario that would look very attractive right now. Even if you were bullish last spring, and if you would have bought put options on your unsold production, you would have transferred your risk to someone else while leaving the upside potential wide open and locking in minimum price. Another idea would have been to sell when everyone was bullish, not an easy thing to do, and buy call options to protect your risk if prices move higher as you have locked in your sale price.
Lastly, you can not outguess the market. Everyone will try and the truth is most will fail. If you are a hedger, then hedge and don’t speculate. The one thing to remember is you might think the market is wrong, but it is always right. The proof of this will be in your results at the end of the year.
While we can’t go back in time and change our marketing from this past year, we can learn and grow from what we have learned. To take advantage of the marketing opportunities, we must be willing to transfer risk to someone else and not be willing to try to pick tops or bottoms in the markets or outguess the markets.
———
The Market Insider is an opinion only; expressed with the best intentions, but not guaranteed. The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed because of their complexities and their reference to the future. The risk of loss in trading commodity futures may be substantial and therefore may not be suitable for the recipients of this information. For more information, call (866) 203-9655 or e-mail bhoops@midwestmarketsolutions.com.
© 2009, Midwest Market Solutions, Inc.
had the opportunity to sell $7.50 corn, $16.00 soybeans, and $20.00 wheat; while some took advantage of these incredible prices, there are others who are only able to look back and wonder about what might have been in 2008.
While prices were moving sharply higher in March through June, most producers and analysts were bullish and projecting higher prices still. The fact that December corn and November soybeans both reached the all time highest price levels in history did not jump start the majority of producers into becoming proactive and locking in enormous profits as they believed that the downside risk was minimal and there was no reason to do any marketing as the opportunity for $7.00 corn and $16.00 soybeans would always be available.
Well, what have we learned? First of all, people are always bullish at the highs of the market and bearish on the lows. Using the sentiment index that measures bullish and bearish readings on a scale of 0 to 100, with 0 being the most bearish and 100 being the most bullish, from January through June corn had a reading of over 90. This implies that during the majority of time that producers should have been actively doing marketing, the masses were bullish and didn’t do anything. Contract the bullish reading with this week’s 6 reading for corn.
The low reading implies the masses are extremely bearish and corn may be ready for a small rally. We know that the fundamentals are generally bearish, but the technical action; maybe telling us the winter lows may be in for a while. In soybeans, a similar bullish reading of 90 was seen from January through June and currently stands at 6.
Secondly, strategy will always outperform outlook. No matter who is providing the outlook, we are all human and thus capable of making errors in judgment. In this business, someone who is correct even half the time, is likely doing a good job. But is a 50-50 track record good enough? If you are a producer of corn, soybeans, or wheat, you can’t afford to be right only half the time. You must protect your business and minimize your risk by transferring that risk to someone else.
More than anything, producers should have learned this lesson this year. No matter what their outlook was this year, buying put options for corn, soybeans and wheat would have effectively locked in a worst case scenario that would look very attractive right now. Even if you were bullish last spring, and if you would have bought put options on your unsold production, you would have transferred your risk to someone else while leaving the upside potential wide open and locking in minimum price. Another idea would have been to sell when everyone was bullish, not an easy thing to do, and buy call options to protect your risk if prices move higher as you have locked in your sale price.
Lastly, you can not outguess the market. Everyone will try and the truth is most will fail. If you are a hedger, then hedge and don’t speculate. The one thing to remember is you might think the market is wrong, but it is always right. The proof of this will be in your results at the end of the year.
While we can’t go back in time and change our marketing from this past year, we can learn and grow from what we have learned. To take advantage of the marketing opportunities, we must be willing to transfer risk to someone else and not be willing to try to pick tops or bottoms in the markets or outguess the markets.
———
The Market Insider is an opinion only; expressed with the best intentions, but not guaranteed. The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed because of their complexities and their reference to the future. The risk of loss in trading commodity futures may be substantial and therefore may not be suitable for the recipients of this information. For more information, call (866) 203-9655 or e-mail bhoops@midwestmarketsolutions.com.
© 2009, Midwest Market Solutions, Inc.
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