February 7, 2017
February 1987 was a turning point for both me and the grain market.
On Feb. 17, 1987, two weeks after my first day at Farm Futures, corn futures finally bottomed at $1.42 — the last gasp of selling in the wake of the 1980s farm crisis.
I didn’t know it then, but that was the start of an education in the markets. I started writing about them first as an editor, and later began analyzing price movements. Eventually, I became a broker and commodity trading adviser, before returning to Farm Futures in 2004.
It’s been a wild ride, including $8 corn and beans in the teens. Hopefully, one that’s not over yet.
The market can be a tough teacher. But after lasting this long, some of the lessons have stuck. So here’s what I’ve learned.
1. Nobody knows anything
Trying to figure out the markets is as hard as predicting whether a movie will be a blockbuster or a bomb. So this quote from famous Hollywood screenwriter William Goldman is apropos. Despite two Oscars and a slew of other awards and movie credits, Goldman wrote, “Every time out it’s a guess, and if you’re lucky, an educated one.”
The same is true of the market. Analysts and experts, lots of them, will make all sorts of predictions. A few may even be right. But markets are mostly as unpredictable as the weather. For all the talk about big data and computer models, accurately forecasting prices remains an elusive target.
And while forecasts can provide a general attitude toward the market, picking prices and marketing crops are not the same thing. You can be the worst forecaster in the world and still do a good job managing your farm’s risk.
2. Farmers aren’t stupid
You’ve probably heard this one: Farmers sell most of their crops in the bottom third of the price range. Marketing advisers like to cite this trope as a reason why you should hire their services.
Trouble is, there’s no evidence farmers are bad marketers. Supposedly, somebody somewhere once did a study. But the real research that has been done on the topic actually shows farmers do a pretty good job of marketing.
To be sure, it’s not easy. Our surveys consistently rank marketing as the hardest task most growers face. But if farmers were really bad at it, most of you would be out of business. Clearly, you’re not.
3. You can learn this
Marketing sometimes seems like a dark art known only to members of a secret magical fraternity. But remember what I like to tell farm groups I speak to: You can learn this. After all, my previous job was writing children’s books.
That’s actually true. My credits before joining Farm Futures in 1987 included a series about He-Man and She-Ra. Masters of the Universe, yes, but not the ones trading on Wall Street.
I was lucky to have a couple of good teachers. Farm Futures had two analysts. Bob Utterback, longtime Farm Journal economist, and Brian Basting, analyst for Advance Trading, helped me learn about the markets. While you may not sit across the aisle from two guys with master’s degrees, farmers have plenty of other resources — from commodity groups and Extension classes to online courses.
And, to paraphrase He-Man, “You have the power!”
4. I’m not an economist (and I don’t play one on TV)
Brian and Bob are both ag economists by training. I did take Econ 101, but only after years of writing about unemployment and inflation as a newspaper reporter in the mid-1970s. Before that, the only thing I knew about economics was a friend’s father, who won a Noble Prize for it.
I’m still not an economist. My graduate training is in mass communications. But I learned statistics along the way. Numbers are numbers, whether you’re talking stocks-to-use ratios for corn or reader preferences for story topics.
Economics is part of the market, but an analyst needs to know many disciplines. Geography, weather, agronomy, finance and even politics can affect prices.
5. Correlation does not mean causation
Though I rely a lot on numbers in my forecasts, I also try to understand the limits of mathematics. Two sets of numbers may have a correlation. But as a professor pounded into us, correlation does not equal causation. Just because the numbers look related doesn’t ensure one variable is actually influencing the other.
Take the story I wrote in August showing how corn prices accurately predicted every presidential election since 1960. “If corn prices rise between Sept. 1 and the election, history says Trump should win,” I wrote.
Corn went up, and Trump, of course, won, keeping the string intact. But corn prices didn’t determine the election.
At least the connection between corn and elections is statistically significant. That is, it was strong enough to be more than just chance. It takes extra time. But whenever looking at numbers, I try to test for statistical significance. That’s a good question to ask any time you hear an analyst talking about numbers.
6. The market is always right (even when it’s wrong)
On any given day the price of a commodity is what the market says it is. Most days that price may be too high or too low compared to fundamentals of supply and demand, maybe by a lot. But blaming the market won’t do any good.
I use some fairly simple mathematical tools to try to forecast potential selling ranges, based on fluctuations around the average projected price. The goal is to sell when prices are overvalued, and avoid selling when they’re not.
And I try not to be stubborn about it. A market that isn’t doing what I expect it to may be a tip-off that a new factor or structural change is afoot. Instead of getting mad, it’s better to figure out what I don’t know.
7. You can be wrong for all the right reasons
Every winter I present selling price targets. Sometimes these are based on fundamentals of supply and demand. Other times they’re derived from price charts or historical trends.
The last couple years my track record for these forecasts sounds like the title of a bad country song: Turned out I was right for all the wrong reasons.
In 2015, for example, I forecast a selling range for corn of $4.41 to $4.91, with a minimum rally to $4.58. December futures got within a few pennies of that target in July. My rally came, but it was in the summer, not the spring as I anticipated.
In 2016, my early forecasts were bearish, suggesting $4 would be about as good as the market got. But I also noted potential for a rally to $4.40 if El Niño then in place faded. December futures hit $4.49 on their June rally. But the crop turned out more than 1.3 billion bushels bigger than my original forecast.
So, for the last two years, my price forecasts were fairly accurate, even if the logic turned out to be wrong. Likewise, some years fundamentals follow form perfectly — and prices do something completely different anyway.
8. There is no silver bullet
Early on at Farm Futures, we examined trading systems, trying to find an edge for farmers to use when pricing crops. This was in the infancy of personal computers, so the systems weren’t very complex. Computer power has grown exponentially. But the search for a Holy Grail goes on. Black box trading systems follow complex algorithms, with buy and sell orders done exclusively by computers. So far, it appears these speculators aren’t beating the market. High-frequency traders just make mistakes faster than you do.
Price charts, sunspots, moon cycles, volcanoes — there are many theories to follow. All of these seem to make sense, until they don’t. Nonetheless, it’s good to know which of these is in vogue.
Traders have a pack mentality. The herd moves together, just like everyone loved the emperor’s new clothes. But when these patterns fail, they fail just as fast as a naked king.
You can’t keep these speculators out of the market, anymore that you can keep money out of politics. But watching what the fast money is doing can help you spot opportunities.
9. Past performance is no guarantee of future success
Just as no trading system seems to work for long, there’s no evidence anyone can truly beat the market. Many will claim success, even though the fine print accompanying their pronouncements always carries a disclaimer.
Nassim Nicholas Taleb, who coined the term “black swan,” is a mathematician, trader and author of the book “Fooled by Randomness.” Taleb believes much of what we call skill is really just luck, the result of random chance.
If all the foolproof schemes advertised in print, TV and online really worked, we’d all be rich — and have perfect skin. So it’s best to be very wary if anyone claims to have the secret to the market’s ups and downs.
10. Have a Plan B — and C
Having a written marketing plan is a hallmark of successful farmers. But even many of these producers don’t have a backup plan in case their initial road map hits a detour.
It’s crucial to expect the unexpected, and to prepare for it. What will you do if your price targets aren’t hit? Do you have triggers for drawing a line in the sand to force sales if the market falters? What if your crops are hit by drought?
Every marketing plan needs to deal with contingencies. Some what-ifs can be laid out in advance: For example, what will you do if the size of a crop turns out significantly larger or smaller than original forecasts?
Other curveballs may come out of the blue. For these, marketing plans need a process for evaluating new developments and making changes. With any amendments, discipline is needed to avoid knee-jerk reactions to a new headline.
11. Options aren’t for everybody
Options are one way to give your marketing plan flexibility. But they’re still frustrating for many farmers 30 years after the contracts began trading again.
One of my first big projects at Farm Futures was a special issue devoted to options. We were enthusiastic, but cautious. Our editor, Claudia Waterloo, passed on the opinion of her father, who traded stock options at the time. He was skeptical about whether farmers would use them effectively.
My research didn’t disprove that view. As I testified before a congressional committee in 1996, it takes at least five years’ experience with puts and calls for options to make a difference on a farm’s bottom line. My later experience as a broker reinforced how hard it is to use options. It’s all too easy to pay a lot of money to buy an option, and then watch as that premium evaporates. Managing this cost is crucial to effective options use, and it means sometimes trading more actively than many growers want, or can manage.
12. USDA isn’t the enemy
It’s easy to gripe about USDA reports. Heck, I do it all the time. But what other agency — or company, for that matter — invites the users of its products to a meeting every year to find out what they’re doing right, and wrong? Yet USDA’s statistical arms do just that every fall, and the complaints have been growing fewer and fewer as a result.
One of the first allegations I heard about the agency from growers was the government’s so-called policy for keeping food prices cheap. This is just one of several conspiracy theories I’ve heard about USDA, whether the ag secretary is a Republican or Democrat.
First of all, to be clear: The government doesn’t have a policy on food or food prices, much less the prices farmers receive. A surge in soybean exports this summer actually increased U.S. GDP more than expected. But for the most part, Washington ignores agriculture, for better or worse. If your farm isn’t making a profit, it’s likely not due to USDA.
13. Don’t panic
“The Hitchhikers’ Guide to the Galaxy” is one of my favorite books. “Don’t Panic” was supposedly on the cover. It’s good advice for managing risk, as well as intergalactic travel.
Reading a headline and selling, say, on a bearish USDA report, is usually never a good idea. Take it from me.
Not long after I started at Farm Futures, the stock market crashed on what’s become known as “Black Monday.” Unfortunately, my own broker worked a few blocks away. I went over and sold everything — on the low, as it turned out — inflicting a painful, but useful lesson.
The following year I took over supervision of our Best Managed Farms contest, and traveled to Ulysses, Kan., to interview Donnie Young, one of the winners. He relayed some advice about marketing he learned from an older farmer: When in doubt, do half.
It’s an adage I use to this day. The idea is to get something done, but avoid big mistakes or rash decisions. In this day of instant headlines that sweep around the world, it’s a good idea to keep in mind.
What have you learned?
Share your own lessons from the market at FarmFutures.com.
Note: Galleries work best in Safari and Chrome, optimization for all browsers coming soon.
You May Also Like