Gulke: Critical Time
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Each day, media commentators offer multiple fundamental explanations for why agricultural commodity prices rise or fall. TV ag announcers use price volatility — in part — to drive conversation, questioning why corn surged one day only to get crushed the next. For some reason, there seems to be a persistent lack of understanding in the media that markets go up, and they go down based on thousands of ideas and conclusions drawn by those with opinions.
The futures market, which influences prices daily, is like a poker game. Players gather around the big table at the CME and play the hands dealt to them, placing bets on the value of a commodity. At the end of the day, the poker game ends — some win and some lose — and for every buyer there is a seller. That buyer or seller can be a speculator, a producer or an end user who buys or sells (hedges) based on his or her needs. It is a net zero-sum game.
We saw the market in action last Friday as prices rose and one analyst suggested $6 corn was in the offing, while another speculated the “weather market” could last another two to three weeks. Monday made fools of both, and broadcasters were like deer in the headlights, struggling to explain how that kind of price volatility could have happened.
Some of the reasons cited Tuesday for a rebound included U.S. weather, crude oil weakness, the China-U.S. relationship, lower crop conditions, yield speculation and its effect on supply and demand, and the wars in Russia-Ukraine and Iran. All these factors — and likely a dozen more — were on traders’ minds as rationale for the price action.
Every day, there are multiple fundamental reasons offered for why something “happened.” Yet few fundamentals ever emerge ahead of time. They aren’t cited as reasons prices moved higher until after the move; hindsight comes into play, and Monday-morning quarterbacks emerge. I learned long ago that the futures market absorbs a myriad of ever-changing fundamentals and distills them into price discovery. Technical price action predicts price movements — up or down — nearly every time.
There is a saying: For every person with a question, there are 100 more wanting to ask the same thing. I received several questions this week about recent price action and will address them here. I will say that it was rewarding knowing the interest in marketing and the obvious intelligence of the questioner. Interest in price risk management is not dead!
1. Why did you turn positive mid-June after being at or near 100% hedged?
Answer: Technical analysis of price action suggested it was time to act. I felt confident in my read of the risk of new lows that would have undermined my optimism.
2. Why did you continue covering hedges and fully lift them on June 30 when other analysts felt the June 30 reports carried no significant meaning?
Answer: My technical indicators on June 15 actually held or grew more positive as prices moved lower into June 30. I saw something encouraging in that report.
3. Did you do anything else near the end of June, and why?
Answer: Yes. I bought August $4.50 corn call options and September $4.70 corn calls, as well as August $12 soybean calls. I felt those strike prices were attainable if my read on further price improvement proved correct. When prices reached those levels, I could either sell cash and stay long, exercise the expiring August calls last Friday or simply take the profits and step aside. I took the profits — then watched the market crash on Monday.
4. How do you feel now, after a weekend of hot and dry weather followed by a negative reaction Monday?
Answer: I’m encouraged by the snapback and still hold the September $4.70 call options with the same plan. The September $12.30 and $12.50 call options look appealing. If futures prices exceed those levels over the next 21 days — after the August WASDE and further Chinese action — prices at those levels would signal that the trade broadly understands just how critical the supply situation could become, and that price rationing may be necessary.
5. What are you doing now? Who do you trust for information?
Answer: Actually, there is not much to do right now but let time and price evolve day by day. I’m long 50% to 60% of my crops in the field unsold, and long some inexpensive call options using the same protocol as when I bought the earlier ones before the big run-up since June 30. I trust my own perspective and that of Gulke Group analysts and brokers. I’ll respect the analysis that brought me to the dance. I trust the work that successfully identified the bottom, knowing full well that tops are far harder to recognize. When the naysayers — those who have been negative for two years — finally come around to what has been and what could be brewing and turn bullish, I’ll likely leave before the last dance.
FINALLY:
Some confusion exists — both in the U.S. and globally — as traders try to get a handle on direction amid still-undefined U.S. supply. Price action matters more than talk right now; it is the flow of real money that reveals conviction. Most U.S. media analysts don’t have skin in the game, and I often find their opinions unconvincing.
I think the swift negative reaction to what looks like a minor weather correction is being used as an excuse for something deeper. We need to see money step in and show its hand. Someone bought corn Tuesday — destinations unknown. When China and others recognize that U.S. soybeans, corn, wheat and other commodities represent genuine value at current prices, we should see price discovery reflect that reality.
So far, the negative bias in the media is encouraging. It is when they turn bullish that I get concerned. After all — who is left to buy when everyone is already bullish and long?
Jerry Gulke can be reached at (707) 365-0601 or by email at Jerry@gulkegroup.com
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