Chip Flory: Six Months In …

March 19, 2019 01:47 PM
 
It’s been one of the most disruptive first halves of a marketing year in memory, so even if you think you’ve learned something, think again and question that thought.

It’s been one of the most disruptive first halves of a marketing year in memory, so even if you think you’ve learned something, think again and question that thought.

The simple lesson to take from the first half of the 2018/19 marketing year is to return to the basics.

  • Soybeans taught traders to doubt the basics. The year started with the highest beginning stocks on record, followed by the U.S. in a trade battle with its biggest soybean-buying customer and then a darn good (not great) harvest in South America. Basic analysis suggests each of those events would be a barrier to higher prices. Instead, soybean futures posted a marketing-year low in September and featured higher monthly lows in the following five months. (Technically, that’s an uptrend.)
  • Corn started with a decline in beginning stocks and a projected tightening of the stocks-to-use ratio. The U.S. reached a trade agreement with Mexico, its biggest corn-buying customer, but Congress has yet to ratify the United States-Mexico-Canada Agreement. Midway through the marketing year, global consumption was expected to outpace production by 31 million metric tons (about 1.22 billion bushels). Basic analysis says each of those events would support higher prices. Instead, corn futures posted a marketing-year low in September, a marketing-year high in October and featured lower monthly highs in the following four months. (Technically, that’s a downtrend.)

On second thought … rule out the “return to the basics” lesson.

I’m a fundamental analyst. I spend my time delivering fundamental information that’s either moving or will move market prices. Keep that in mind when I say the first six months of the 2018/19 marketing year has taught us to turn down the volume on the news. (Ugh.)

Sometimes money flow and investment bias matter most. This is one of those times. That will eventually change and fundamental information will again determine price action.

This all means it’s time to be defensive in risk management. Defensive, in this case, has two meanings:

  • Play defense against lower prices. The fundamental factors described earlier are bearish for soybean prices and friendly for corn prices. However, if soybean prices fall, it will be difficult for corn prices to move higher. And if corn prices rally, it will be difficult for soybean prices to move lower. But the greatest risk in both markets appears to be the downside.
  • An offensive hedge is established when prices offer an excellent return on investment. It’s used to lock in profits. A defensive hedge is established when prices are at an unimpressive level, but the risk of even lower prices is greater than the potential for a price recovery. When a defensive hedge is established, it’s important for you to also be willing to exit the hedge if your expectations of price pressure are proven wrong by prices climbing above chart-based resistance levels.

All episodes of “AgriTalk,” as well as other Farm Journal broadcasts, are available on demand via the “AgriTalk” app. Download the app for free on Apple and Android devices. Learn more at www.AgriTalk.com

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