I was trained as an economist, and the principle tenant of economics is that people, businesses or any other economic actors are "rational". People are expected to interpret, synthesize and act upon new information in a wholly unbiased and rational manner.
But, there is growing evidence that this may not be the case. Just look at various "bubble scenarios" that have transpired in the past 20 years from internet stocks in the late 1990s to the housing market in 2008. Were those of us that bought internet stocks at outrageous Price-Earnings ratios rational? Or were people rational that plowed investment dollars into housing markets as US incomes and the economy were weakening?
As humans, we all suffer from what psychologists have termed "diagnosis bias". It’s not a disease. It’s not a psychological abnormality that impacts the mentally ill. Instead, it is what all are prone to in the face of decision making. We have a propensity to label people, ideas or things based on our initial opinions of them and, even more detrimental, we tend to ignore future evidence that contradicts our initial judgment.
When it comes to marketing or trading, I bet we can all point to instances when we’ve fallen prey to diagnosis bias. You were bullish but the market continued to trade in a very ‘non-bullish’ fashion. Perhaps you favorite indicators were suggesting weakness, but you shrugged it off as being part of the pitfalls of technicals, they can be wrong at times. Maybe the news started to "disappoint" in terms of not meeting analysts’ estimates but yet again you could discount this information as being temporary and not disruptive to your long-term bullish sentiment.
But, the problem you run into is not adequately recognizing the cues that are right in front of you. After all, diagnosis bias can cause any of us to easily dismiss views that differ from our own firmly entrenched stance. Is diagnosis bias preventing you from making the best marketing decisions for your operation?
While I don’t pretend to know whether this bull run in grains is over, there are certainly signs that it might be time to re-evaluate your position if you’ve been on the long side of this rally. Here are some key things I think make you question a strongly bullish perspective:
--Ethanol production has been the darling of the corn sector. But there may be a chink in the ethanol armor. Ethanol prices are not trading at levels necessary to make most plants profitable. Ethanol margins have taken a big hit as of late and even corn prices at mid $7 aren’t helping ethanol producers. USDA has slashed their forecast for 2012-13 ethanol by 10%, but two months into the marketing year we are seeing production cutbacks more on par with 12%.
--Both Brazil and Argentina are expected to produce a massive crop and rainfall in the region seems plentiful putting the likelihood of a big drought in question. Yes, U.S. soybean exports are white-hot right now, but the longer we see better crop prospects coming in 5 months from South America, the quicker our exports will dry up.
--On exports, it is hard to ignore just how dismal U.S corn business has been abroad. Year-to-date, our export inspections for corn are off 37% from last year while USDA projects only a 25% drop.
This year’s drought is behind us and now the market will turn its attention to the rest of the world and demand side factors. While it is possible to have any number of scenarios change that would give us more of a bullish lift in the coming months, the news and data is not favoring higher prices. Don’t let diagnosis bias cause you to lose sight of changing market conditions.