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Markets are looking for answers

By Jon Scheve, Superior Feed Ingredients, LLC

The market has stalled because there are too many unanswered questions.

  • How many acres were actually planted?
  • How many acres will be harvested?
  • How much will the heat affect pollination?
  • How much is dry weather affecting plant development?
  • How much will it rain in August?
  • How many ethanol plants will continue to run post-harvest if there is a short crop?
  • How much export demand will ultimately be lost?
  • Will we get enough growing degree units this season?
  • When will the first frost come?

One thing I know for sure, is no one knows anything for certain about these questions. It will take several weeks before we get some answers, so I expect the market to remain range bound before the August 12 USDA report.

This much uncertainty widens price opportunity. Combine this with production issues in the eastern Corn Belt, and there should be upside potential in the market. However, U.S. corn is too expensive to compete for global demand. One ethanol plant recently signaled they are going to cease operations if prices remain this high once harvest starts. If planted acres are higher than many anticipate, corn may struggle to find higher values. One constant, farmers aren’t generally selling until they know more about crop conditions.

 

A matter of perspective

Like previous years, social media has been flooded with pictures of bad corn fields, while few pictures of good-looking fields get posted. On average the bad to good ratio I’ve seen seems 10:1, so it’s no wonder why so many farmers think corn prices should be higher. So are farmers just not posting pictures of their good fields, or do they not exist?

There’s no question that pockets of the Corn Belt are worse than others. The biggest concentration of poor-looking fields seems to be within the triangle from Indianapolis, Ind. to Columbus, Ohio to Grand Rapids, Mich. So, farmers in this area may find it frustrating or even hard to imagine that fields in other states aren’t as heavily impacted.

But evaluating crop conditions between fields can be really subjective and personal biases can often get in the way of providing objective analysis of widespread conditions.

 

Three farmers, three different perspectives

This week I spoke with three different farmers who traveled basically the same route from southeast Nebraska to southwest Missouri on vacation. Each farmer reported back to me how crops looked, without knowing I received information from other farmers on the same route during the same time period.

Surprisingly, each farmer provided very different crop conditions and plant development reports. One said generally most fields were bad, the second thought fields looked average, and the third said the fields looked great — all from the same route. To me this illustrates how different perspectives of the same fields can lead to widespread confusion and uncertainty among others who hear each of these farmers field trip report.

 

Biases affect our perspective

It’s been my experience that farmers with a lot of corn left to sell will more likely think the crop looks worse than it really is, justifying why they haven’t sold their grain yet. Conversely, farmers who just sold a lot of corn will see the same fields and think they look average or better, again justifying their recent decision to sell.

Analysts can do it too. Often, I see an analyst say corn has to move in one particular direction, and then put out a recommendation that aligns with that movement. This probably makes some sense because why would you place a bet on something you don’t think will happen.

It’s easy to fall into the trap of only listening to those that have the same biases as you, because it feels comfortable. It also makes it easy to then believe, if others agree with your position, you must be right. However, this attitude can make farmers vulnerable to risk and loss. Right now, I’m seeing many farmers turn into speculators because they are betting that prices have to go higher.

It’s true there are many reasons prices could go up, but I could also list many reasons why prices could also stay flat or go down. I’m not sure some of these farmers that are speculating are prepared for either scenario.

 

Thinking differently: Reducing biases when making trades reduces risk

To push back on my own internal biases, I make sure that every time I place a trade I fully understand what will happen if the market goes up, down or sideways and I need to be able to say, “I will be ok if that happens” for all three outcomes. If my response to an outcome is, “that won’t happen” or “that would be bad” then I’m letting my biases affect my judgment and I’m increasing my risk.

Some farmers tend to follow a few analysts that they generally agree with their perspectives or only the ones that think the prices have to go up. I think it’s important to listen to the insights of analysts I disagree with too. As a farmer I naturally have a bias that markets should go higher. So, to maintain perspective it’s important to hear from those saying why it may not happen. Listening doesn’t mean I have to take their advice, but hearing alternative interpretations to market variables can keep my biases in check and help me maintain a well-balanced marketing plan.

Biases aren’t inherently bad and it’s unrealistic to never have them. After all, when I choose to sell or not sell, I make that decision based upon the beliefs of the information I have of where the market might be going. The trick is to be open-minded to market scenarios that may not align with what I want or believe are likely to happen. As new information becomes available, I need to adjust my outlook and my biases.

 

Please email jon@superiorfeed.com with any questions or to learn more. Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

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