In this industry, whether as economists, brokers, or consultants, we are constantly presented with some version of the question, “where is the market going?”
Price prediction is a risky business. As reflected by the sharp increase in volatility in soybean futures this past week, the wide array of factors that simultaneously affect the markets seems to make predicting day-to-day price movement impossible.
What occurred in the soybean market last Thursday alone, is a textbook example of the risk in attempting to predict price. As the day began one could have thought the market may have simply “turned-around” after the USDA report, as it can do at times. But is that the case?
At 6:00 a.m. CST, CONAB—Brazil’s equivalent to USDA—pegged Brazilian soybean production for 2021/22 at 125.5 MMT. That was 15.0 MMT below CONAB’s previous estimate, or the equivalent of losing Iowa’s entire soybean crop. Plus, it was 8.5 MMT below the USDA forecast of 134.0 MMT in Wednesday’s Supply/Demand report.
By 6:10 a.m., March 2022 soybean futures had notched a contract high of $16.10—up more than $0.15 from the day before. March futures built on those gains, climbing to $16.33 at 9:30 a.m.—up more than $0.38. The trend shifted rapidly after that, however, and by 11:30 a.m., March futures had plummeted to $15.90—down $0.43 from the contract high.
By the close of trading, March had tumbled another $0.15 to close at $15.74 ¼, or $0.20 ½ lower for the day.
So, what happened?
The short answer is it’s impossible to know for sure. It’s worth noting there were some warning signs for demand in the Supply/Demand report. For example, USDA reduced China’s 2021/22 soybean imports and soybean meal consumption by 3.0 MMT and 2.2 MMT, respectively. In total, February’s 3.7 MMT decline in global soybean meal use was the largest month-to-month reduction that we can ever recall seeing.
It brings to mind the old market adage, “there is no cure for high prices like high prices.”
A case could be made that the sell-off may have been linked to long-liquidation by the speculative sector following the latest extended rally. There were also rumors that China may be considering canceling previous purchases of U.S. beans due to negative margins. Or, perhaps, it was a combination of these factors (and others that are not yet apparent).
Turning market uncertainty into opportunity is a primary objective of a disciplined risk management strategy that is designed to defend your balance sheet. This serves as an important reminder of a key risk management principle: The wide array of factors that simultaneously affect the markets makes predicting day-to-day price movement impossible, much less projecting long-term trends. Accepting and embracing this principle is a critical step in developing and implementing a risk management strategy that is designed to defend your balance sheet.
A strategy that is built upon discipline in managing a position—as opposed to price prediction—can turn market uncertainty into opportunity.
Many believe there are advisors, brokers or ag industry people that have the ability to predict price. If someone suggests they can predict price, ask them for copies of their last 10 years of trading statements!
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The opinions of the author are not necessarily those of Farm Futures or Farm Progress.