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Why price prediction is a fool’s game

Getty/iStockphoto Price chart with large question mark
A marketing plan built around price prediction could result in missing out on the current rally.

Did you win a million dollars betting on the most recent Super Bowl? I know I didn’t. If you could have predicted the winning team, point spread or even the coin flip correctly, you would have put yourself in a position to win a truckload of money.

Gambling a small amount of money on a game can be a lot of fun, especially if you win. However, when it comes to grain marketing, gambling on price prediction can be very costly to your farming operation.

Be very wary of the perils of building a marketing program around price prediction, especially in today’s extremely volatile markets. Many producers had a large amount of production committed to grain pricing programs built on price prediction and, unfortunately, the predictions were incorrect. These farmers are now missing out on the current rally.

No matter how well-intentioned and researched a price prediction strategy is, it is still as risky as gambling on the coin flip in the Super Bowl.

What’s driving the rally

The current rally in the corn and soybean market is being driven by unforeseen circumstances. A year ago no one knew that portions of South America would be in an extreme drought. No one knew that there would be a potential conflict between Russia and Ukraine that could jeopardize Ukraine’s ability to grow, harvest and export their agricultural products.

We do not know the size of the South American corn crop this summer, much less what we will produce domestically. We do not know if the cost of inputs will continue to rise in 2023 or if we will see those costs revert to a more normal level. However, we do know that the market is unpredictable and that trying to guess what the future will bring is full of risk.

As I visit with my customers, we are always keeping an eye on the future. Currently, December 2023 corn futures are $5.60 and November 2023 soybean futures are $13.10. Will these be the highest prices for those contracts or will the market skyrocket to much higher levels? Again, no one knows the answer to that question.

Risks for locking in 2023 production

So, if a grain farmer can sell grain at a profitable level, should he or she do it? What are the risks? The risk, if someone was to market corn or soybeans for 2023, is that the markets rally from their current levels and the producer feels like they missed out on an opportunity. That is why we advise buying call options to defend against higher markets after a sale is made. Being a hedger allows you to manage the risk in these highly volatile markets. This strategy gives you confidence to make a sale and defend that decision because the future is unknown.

As you move through the current marketing year and into the next one, it is important to avoid pricing programs that are based on price prediction. Embrace the mindset that the markets are unpredictable and no one knows if prices will go higher or lower. Manage the risk using the tools that are available and avoid predictive models.

Contact Advance Trading at (800) 664-2321 or go to www.advance-trading.com.

Information provided may include opinions of the author and is subject to the following disclosures:

The risk of trading futures and options can be substantial. All information, publications, and material used and distributed by Advance Trading Inc. shall be construed as a solicitation. ATI does not maintain an independent research department as defined in CFTC Regulation 1.71. Information obtained from third-party sources is believed to be reliable, but its accuracy is not guaranteed by Advance Trading Inc. Past performance is not necessarily indicative of future results.

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

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