Scheve: How Biases Can Affect Grain Marketing Plans
May 28, 2018
Market Commentary for 5/25/18
There are several reasons why someone could be either 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 US. 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
- Trade unknowns involving NAFTA
- 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
- 2017’s 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.
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 $3.00. 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 necessarily wrong to have biases, after all biases help people make decisions and drive market direction up and down. Still, it's important to be aware of them.
As I wrote above there are a lot of reasons why the market could go either up or 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. Last week one analyst told farmers to protect their downsides by buying puts, because the market may not rally (siting some of the bearish reasons above). Then the very next day a different analyst told farmers the market is going to rally to $5 (siting some of the bullish reasons above), so they should be buying calls on anything already sold.
This kind of flip-flop advice can be very confusing for farmers. It's important to realize 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 a lot of trades, so their goals and objectives might not alight with farmers. 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. Still, farmers need to understand this when taking their advice and make sure they understand at all possible outcomes of any trade before committing.
It's easy for farmers to only listen to the advice of whoever is saying what they want to hear at the time, but they need to be careful because that can lead to confirmation bias. 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 as well. As a farmer I naturally have a bias that markets should go higher. So, to maintain perspective it’s important to listen to those saying it 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 information and beliefs 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.
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.
Superior Feed Ingredients, LLC
9358 Oak Ave
Waconia, MN 55387
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