As mentioned in my weekly radio overview with Sara Schafer, the major market factors are centered on the following:
- China buying corn with 300,000 mt announced and more likely.
- Soybean news was silent as South America begins to export a good crop in Brazil and an excellent one in Argentina.
- Flooding in America’s growing regions from Canada to Missouri and from Nebraska to Indiana is putting the best laid plans of the important acreage mix now up to Mother Nature and not necessarily Economics 101 (profit/loss).
- African Swine Fever in China is cutting pork (good for U.S. exports—bad for protein and feed-grain consumption).
- While U.S. hog consumption of feed-grain and soymeal is more important than China, the ramifications of lower global needs is another headwind to deal with on top of still uncertain tariff outcome.
- All this make for uncertainty of the supply-and-demand fundamentals but as the charts below show, the technical aspects of price discovery, not matter how distorted in this political environment, are still very important to price discovery/outlook and risk management.
The trading pattern along with resistance and support areas, and with the help of proprietary buy/sell signals not shown, reflect what is now obvious. The price of $3.70 proved to be value and a place to remove (lift hedges) looking at $3.82 as a meager upside objective and perhaps too small an objective for some in the media to pay attention to. However, you can readily see corn blew right through $3.82.
(click images to enlarge)
So now what does the media analyst do that advised buying a put or just fighting margin calls do? Does he or she now blow out of hedges at $4.00 or just watch like deer in the headlights? What do the heavily short funds do now that $3.70 held just about the time water/floods fell on the corn belt and China buys corn? Does he run for cover or not?
The answer lies in knowing when to hold ‘em (accept risk) and knowing when to fold ’em (hedge off price risk). If you haven’t accepted the value of technical analysis along with a pro-active understanding of market fundamentals and market psychology in the past months, then I have failed to make a dent in the mindset of serious marketers.
What is said about corn can be extrapolated to soybeans and even stock market equity associated with commodities like the Tyson chart below.
Note the importance of the former uptrend line from September to February, ending when South American weather and crop relatively insured in spite of a new thrust by China to buy soybeans. Now there appears to be another crossroads as the important $9 support is threatened by an overhead resistance that soybeans have yet to crack. Will it make any difference if China buys more or not given the increased uncertainty of planting weather? The future of chart action will point the way!
A picture is worth 1,000 words. Again, what was not obvious to some in mid-February was the collapsing thrust below support dating back to mid-August when futures left behind a months’ worth of trading in June hogs below $74. While the upside explosion and its extent were not known nor, the signal to get out of hedges, therefore being intrinsically long in the pen, was the key. What is supposed to be a profitable business tied to either cut-out price or some sort of formula that basically isolates the packer from some risk while the producer carries it, is now futher exasperated by the possibility of ASF appearing in the U.S.
Producers are at risk under any type of contractual agreement but being open for the last $22 speaks for itself. Fundamentally traders got impatient and full of apathy waiting for something to happen while being discouraged at prices falling $12 under the Chinese dilemma not understanding that timing and market psychology was as important as believing hog supplies were going to drown the price prospects. You probably read them all? The Cattle On Feed report was not present at this writing, but could have consequential effects on meats in general and live cattle in particular.
FINALLY let’s look at a publically traded equity like Tyson to view price discovery in a somewhat unbiased form with a technical focus as an aid may prove interesting. All the negative, or not, fundamentals regarding Tyson’s balance sheet can be research through any brokerage/research firm, but projecting what Tyson did under our current environment is not. Note the Christmas gift of the collapse in the stock market gave an opportunity to own Tyson at a price level that was below anything on the chart. That collapse was a gift from a risk standpoint as price dropped $35 from $50 high to $30. Odds were that one wouldn’t lose another $35!
With the ASF in mind and regardless of whether pork eaters would believe that a dead hog with ASF was not harmful to humans may be a stretch. China was in process of buying chicken from other sources as well. Tyson is famous for chicken. One of the first moves Ag Secretary Purdue did when the $12 billion support was announced was to buy chicken for school lunch and other programs. Tyson is known for pork as well. If there was a China “deal” to buy pork, would not Tyson benefit. Do corporations support both political parties? If there was a China pork and maybe a chicken deal would not Tyson benefit at least somewhat? Would it not be naïve that we would see a stock related to such activity start to appreciate before the actual Chinese buying would result from negotiations?
Is it a mere coincidence that Tyson has appreciated nearly 40% since the Christmas gift? Is it a coincidence that stocks often gain back 50% of what is lost in a post-bottom? Isn’t it interesting that Tyson is now back up to 50% of the total loss from December 2017 to Christmas 2018? Just seems too obvious does it not? It is more important it seems to be on the right side of a move rather than overanalyzing details and get lost in the forest of trees rather than seeing daylight. The chart of Tyson’s last three months response to the situation at hand is worthy of one’s time.
Good technical analysis is worthy of your time and expense. It is an investment in being able to lower the risk of making a “big-bad” . We all make errors, as that is how we learn. But especially in the farming business, we can’t afford to make a big error. I suspect the miss-calculations by major firms in 2016 that missed the price appreciation as well as the miss-calculation of the drop in soybean prices nearly a year ago betting that the tariff wouldn’t/couldn’t last long, were big errors. Missing the extent of a bull market is rather immaterial to a price collapse. Anyone can make money in an up market as it is just some that make more than others. However, in a bear market, especially in the current environment, a small drop can wipe out all the profitability; that is net taxable income. “That” is an error few can afford for any length of time.
There is obviously more to price analysis than what might look like a simplistic view presented here. But I hope it peaks your mind and makes you think out of the box. I’ve seen market analysts come and go in the past 30 years and there may be one or two yet in the business that I would trust with the marketing of my farming.
We have a lot of “plant managers” in the business who are supported by nearly every commodity org in the country opting to dwell on growing more production while ignoring what missing a dollar drop in soybeans or 50¢ in corn does to the bottom line. Bankers for the most part are unconcerned with marketing and wish to stay that way. Universities do a paltry job of education of real marketing; selling at a break-even isn’t a strategy. Price outlook with due diligence leaves a lot to be desired, just read the internet or listen to the media. Worse yet, I fear a simple understanding of the basics of price discovery and the merits of price movements are still at the bottom of the list of “to-do” things and certainly not on many “bucket lists”.
Jerry Gulke, President Gulke Group
Contact Jerry ag [email protected] or leave your contact info or call 480-285-4745 or 707-365-0601.
Read more from Gulke at AgWeb.com/Gulke