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Why do I need to know about markets?

Understanding market activity is essential in making informed marketing decisions, knowing when to buy or sell and capturing opportunities to capitalize on market fluctuations

What types of market information should I pay attention to?

1. US and World Production/Supply

   • Beginning stocks

   • New crop production potential

   • Weather/growing conditions

    

2. US and World Consumption / Trade

   • Domestic consumption projection

   • Import / export activity

   • Transportation logistics

   • Market constrains (import barriers, tariffs, preferential access)
      

3. US and World Ending Stocks

   • Carryover projections

   • Stocks-to-Use projections

How can you predict where market prices (cash and futures) are going? 

No one can predict prices with absolute certainty.  After all, one of the primary functions of these markets is “price discovery.”   But there is plenty of information available regarding both market fundamentals and technical information (much of it at little or no cost) to help you determine appropriate prices to buy and sell. 

What are Market Fundamentals and Technicals?

For cash markets, prices are mainly driven by fundamentals and for futures it is a combination of fundamental and technical signals.  Both are explained below.
 

What are they?

Market fundamentals involve a combination of supply and demand factors that are constantly changing.  Numerous government and private forecasts and analyses are available to help you track these changes…

• Weather / natural disasters that can drastically cut production in major production areas

• Crop harvests / final quantities, quality and timing

• Transportation logistics

• World politics / population growth rates / economic prosperity will all determine consumers’ purchasing power

• Currency values

• Consumer preferences / consumption patterns change with price, time, technology

• Changes in government farm programs and payments

FOR EXAMPLE… Take a look at fundamental information gathered for Marketing Year 2004-05 compared to the year before (drawn from USDA’s November 12, 2004 projections) …

MY 2004-05 – Wheat – Global and US supply and demand balance sheets are bearish…

• World wheat production is projected to increase by nearly 12% to a record 617 MMT, 65 MMT more than last year and the largest year-to-year increase in more than 45 years.

• Production is expected to outpace consumption by about 11 MMT, a major reversal from last year when consumption outpaced production by 36 MMT.

• World ending stocks are expected to increase by nealy 9%, after falling 22% the year before.  

• EU-25, Russian and Ukrainian exports are all expected to jump by double and tripe digits this year.

• US ending stocks are expected to increase by 4% this year, while exports are projected to fall nearly 20%.

• On the bullish side, Canada’s wheat crop has suffered quality losses due to adverse harvest weather, which should open the door for more US HRS exports.  The Australian crop is now estimated to be smaller than expected at 20.15 MMT, compared to 24.9 MMT last year.

• China is expected to continue its robust import pace. USDA is projecting Chinese wheat imports of 8.0 MMT, compared to 3.7 MMT in MY 2003-04 and only .4 MMT in MY 2002-03.

• US dollar slipped to a nine year low in late fall 2004 against other major world currencies, which is making US grain exports more competitive.

MY 2004-05 –Coarse Grains – Global and US supply and demand balance sheets are bearish…

• World coarse grain production is projected to increase by 9% to an all-time high of 985 MMT, an increase of 81 MMT from last year.

• Production is expected to outpace consumption by about 21 MMT, a major reversal from last year when consumption outpaced production by 36 MMT. 

• US is expected to produce a record corn crop of 11.7 billion bushels.

• Domestic demand remains strong, with livestock feed and ethanol use above year ago levels.  However, US corn production is estimated to exceed consumption by 74 MMT.

• World ending stocks are expected to increase 16%, after falling 22% the year before.

• US ending stocks are expected to increase a whopping 78% this year.

• On the bullish side, Chinese corn exports are expected to fall nearly 47%, while US exports are expected to increase 7% this year.

• What affect is the weather having on production in the US Great Plains?  Have there been any natural disasters?  Will this cause prices to be bearish or bullish?

• How does the approaching harvest look?  Will it be on time?  Will the grain be of high quality?

• Is anything happening in the transportation industry that may affect prices? Is the economy healthy? 

• How are world politics, etc. affecting consumer purchasing power?

• How are consumer preferences influencing prices?

• Has the value of the US dollar changed recently?  What if anything is the likely affect?

Speculative traders (funds and other investors) typically will take futures positions based on a combination of technical trends and fundamentals, although technicals will be the dominant feature.

What are technical charts?

Technical charts are graphical presentations of futures market trend data and statistics that are readily available from various computer programs.  These technical trading charts will track price trends and identify buy and sell signals based on moving averages of closing futures prices.  Technical charts support the old adage, “one picture is worth a thousand words.” 

Some chart sources: www.ino.com or www.tfc-charts.wad.com

Grain producers who use futures should consider using both fundamentals and technical charts / moving averages to guide your hedging program.  Moving averages will be most useful in helping you pull the trigger on taking a futures position. 

How might I use Technical Charts?

Take advantage of Entry and Exit Strategies

• Goal should be to catch a big part of any upward price move (up trend) and get out with decent profit before market turns against you.

• Trade with the trend, not against it.

• Great perils in trying to pick market tops and bottoms.

• Don't enter any trade without a well thought-out exit plan - can be modified in a break-out market.

• Minor corrections within a trend usually offer good entry points.

• Entry and exit points should be based on pre-determined support and resistance price levels, as identified in the technical chart trend lines.

Take advantage of Seasonal Trading Patterns

Corn seasonality can be divided into three time periods

• Late spring to midsummer - prices trend higher as existing pipeline supplies tighten and uncertainties with new crop (may be highest in July if pollination is hurt by high temps).

• Midsummer through harvest - most pronounced seasonal trend is downward as new supplies weigh on market.

• Post harvest - prices usually rise as demand becomes dominant feature as cooler temperatures require more animal feeding, but a "February break" lower is a common trend.

Wheat has two seasonal pricing patterns

• Post harvest to early winter -- prices rise as supplies are largely known and interest shifts to the demand side.

• Late winter into mid point of harvest (July) - prices decline.

How can I find get access to fundamental and technical information?

Utilize available information sources (See Appendix II).

MOST IMPORTANTLY….  What do I do with this information?

Using current and historical information about the market can help you to develop price expectations for the marketing year. 

• Estimate a realistic average price for your crop by predicting future market behavior

• Benchmark for comparison

  • US Average Farm Price Received Database
    http://www.farmdoc.uiuc.edu/marketing/index.html

  • Idaho Crop and Livestock Long Range Planning Prices

    http://www,ag.uidaho.edu/AERS, click on Resources, then Crops

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