Farm Progress is part of the Informa Markets Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Moving averages aren’t bulletproof

Getty/W. Geiersperger Stock market price chart with trend line
It can take several days for moving averages to account for strong market shifts.

Moving averages are a common and useful tool in evaluating price movement. They smooth out the price to give us a “cleaner” view of what prices have done and they help eliminate the choppy volatility. Shorter day moving averages combined with longer day moving averages can provide buy or sell signals depending upon when they crossover.

You can take your pick of which number of days you want to choose from. Perhaps  some of the most popular are 20 day, 40 day, 50 day and 200 day. The primary drawback of moving averages is that they are lagging indicators. While they help draw a picture of what prices have done over the last 20 days (or whatever length of time you choose), they are slow to catch up when there is strong shift in direction. If prices begin to rally, it will take several days for the moving average indicator to reflect that because it must take into account the previous days’ price action.

Much like moving averages, the USDA is a lagging indicator. While the USDA wields a great deal of influence, the estimates are typically months behind what farmers are living in real time. This gives end-users and other buyers more time to secure product at more favorable prices. It also places more pressure on farmers to manage their marketing risk until the USDA can eventually catch up to what the final yields results truly are.

This was never clearer in the way they handled last season’s reporting. The 2020 August crop report called for a corn yield of 181.8 bpa and soybean yield of 53.3 bpa. We knew that the corn yield estimate was far overstated by just looking out the window watching our crop condition collapse. And yet it took the USDA until January to reduce the final yield to 172 bpa, nearly a 10 bpa difference. Had this revision happened sooner, farmers would have benefited more.

It is difficult to know what our yields will be this year. Many areas are on the edge, living hand to mouth. But what we do know is that crop condition ratings are well below last year’s, and the trend in those condition ratings is going to deteriorate further given the absence of any soil moisture reserve and not enough moisture in the forecast to change that. Moisture requirements begin to increase dramatically in the month of August.

While we have already lost the top end of our yield in Iowa, we may still produce a decent crop if adequate moisture returns. Or we may see yields drop hard like we saw last year at the end of the growing season. This makes me hesitant to forward sell anything because I won’t know if I am selling 25% of my crop or 50% of my crop. Ending stocks are tight this year and any hiccup in production will send prices higher.

This is the time of year when analysts begin sharing their yield prospects. The general consensus is that they will drift lower, but that is not the case for everyone. Some forecasts see overall yields move higher. I may not agree with that assessment, but we can never be sure. That is why we identify price support levels, placing hedges to make sure we are protected.

Matthew Kruse is President of Commstock Investments. He can be reached at [email protected].

Futures trading involves risk. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that CommStock Investments believes to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

 The opinions of the author are not necessarily those of Farm Futures or Farm Progress.

Hide comments
account-default-image

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish