Category Archives: Trading Fundamentals

If you don’t have a written plan…make one!

Remember, it’s not about when you should or shouldn’t be making a “sale”. It’s about how you set things up in advance so you can resist the urge of doing something stupid when the human emotions kick-in. We all know and tell ourselves it’s the long-term that matters, but that theory tends to go right out the window when the short-term starts happening. That’s why you have to have a “plan” and must force yourself to stick to the plan. In today’s waters you have to market based on “rules,” not simple hunches or gut feelings. As we head into the new-year, the best advise I can give is to take the time to get with your advisor and devise a longer-term marketing strategy that is right for your operation and your families cash-flow needs. Then actually execute that plan.  

The REAL Reason I Believe Grains Are Moving Higher

As most of you know, I spend a lot of my time talking to fund traders and large money-managers trying to pick their brain. With another year of big gains in equities and only 12-trading days until year-end, most of the big payers seem to be looking for ways lock in profits, hedge against “unknown” price-risk and decoupling. The crazy uncertainty now surrounding crude oil and the energy sector has a lot of guys spooked and is obviously pushing “fund-money” in several unexpected directions. A few clear and obvious beneficiaries as of late have been corn, soybeans and wheat. This might be a tough bridge for some to cross, but for others it appears much more logical, especially when you consider we are rolling into what could be more extreme winter weather, continuing turmoil between Ukraine and Russia, an election in Japan, Fed divergence from the rest of the central banks, a newly controlled Republican Congress, Greece and parts of the EU once again moving towards unstable ground. Not to mention the amount of debt the oil companies had on their books 5-years back was only around $200 billion, while now it’s all of a sudden up around $3 TRILLION. In other words there could be secondary derivative impacts the investment world hasn’t even thought about yet that players are now trying to reposition and protect against. Remember, we have now seen over 80 straight days of declining prices at the pump. Also remember, this is traditionally a “thin” period of time where moves can become extremely over-exaggerated! In other words, when you get major “headline-risk” like we are seeing in the energy markets, coupled with lower than normal trade volume, all bets are off in regard to traditional fundamental rhyme and reason. Like Bill Gross said this past weekend, “The sharp decline in the price of oil has disoriented markets and changed the perception of the creditworthiness of companies and countries. When levered money moves and tries to seek a safe haven, basically you have violent price movements across the board.”

Personal Thoughts On The Evolving Market

Personal Thoughts: My last cash soybean sale at $10.45 felt for a brief moment to be an extremely smart play, now it clearly appears to have been nothing more than a premature-sale. Probably what I’m most upset about is the fact I didn’t act on my instinct and purchase the “strangles” 30-45 days ago when the “vol” was low and prices were trading at the low end of the range.  From my perspective that’s been somewhat “easy-money” the past few years with the Quant’s, Algo’s and HFTs in the game.  Something similar in todays marketplace might be going out and  buying the JAN15 $80 WTI Crude Oil Calls and at the same time Buying the JAN15 $75 WTI Crude Oil Puts.  Rember, in buying the “strangle” your not trying to predict direction, but simply betting the market doesn’t trade in a sideways channel. Right now it would cost you about $3,000 to make the play, obviously having been much cheaper when the “vol” was lower.  What I’m trying to point out, and something we have to understand, is that many of the players in todays marketplace strive on extreme volatility, many the traditional rules have changed. Below are a couple of lessons I’ve learned:

Know the Rules of the Game – More specifically know the “unwritten” rules of the game.  When these rules change all prior knowledge and understanding about the game has to be modified.  When the NFL changed the “pass interference” rule, head coaches quickly starting adapting and making changes to the routes their receivers were running.  At the same time defensive back coaches started changing the techniques they were teaching.  Same thing has happened in the investment world. With you being the head coach of your own investment portfolio or farm marketing program, you have to recognize the new written and unwritten rules and the NEW way the game is being played. This clearly dictates the need for new strategies and new techniques being implemented on your end.

Size No Longer Matters – The markets being similar to sports have become more about “speed” than about “size.” As my coach always said, “It’s not the big that eat the small, but rather the fast that eat the slow.”   If “speed” has truly become the edge, then you have to believe extreme volatility gives those with speed and the ability to most quickly change direction the decisive advantage.  Moral of the story, be careful being extremely long or short when the market reaches extreme levels. Remember, there is still a large amount of “financial” money at play in the commodity markets.  How much froth and and unpredictability is that creating in the marketplace, I don’t think anybody really knows?

Hedging Cattle Near The Highs?

Hedging Cattle Near The Highs? There have been some questions as of late about why I elected to hedge or lock in profits in the cattle market if I remain a longer-term bull? I guess the easiest way to explain it is the fact I am worried about the quant’s, algo’s and money-mangers flushing out of their long positions as fears of a slowing global economy and the spreading of Ebola ripple2026012_orig through the marketplace. On top of the macro geopolitical fears, I’m also concerned that we might start seeing a lot more competition from cheaper alternatives like chicken and pork. From what I hear poultry production is expected to jump by 5-7% next year. Bottom-line, both pork and poultry are much quicker and easier to ramp up than beef production. Hence cheaper pork and poultry prices might start to weigh on beef demand. From the bullish side, I understand the slaughter continues to run -15% to -20% behind last years pace. At this level there is simply no way beef supplies can fulfill current demand. This obviously sets the stage for a major clash between the bears and the bulls. The traditional fundamentals are obviously keeping me a longer-term bull, but understanding that “money-flow” is king, the current negative macro and geopolitical fears are making me a bit more nervous. I believe with cash supplies staying tight, there will be some good rallies between now and year-end. I think it’s smart to use these rallies to hedge and eliminate possible unforeseen downside price-risk.


Trading “Flags”…or why sometimes it’s best to just do nothing

Like I have said for the past couple of weeks, I continue to believe spec’s are best-suited standing on the sideline, at least until the markets return to more normal and traditional patterns.  It’s taken me a long time to learn it, but the decision NOT to be in the market is equally as important as your decision to be bullish or bearish. In other words you don’t always have to be swimming in the water.  When the “red flag” goes up on the beach step aside. Below are the standard universal beach warning flags: 

  • Green Flag: The ocean (or should I say market) is always unpredictable, and even on clear and calm days, hazards still exist. Still, there are days when the threat of danger is lower than others. A green flag on the beach (or market) is an all-clear sign, indicating that it’s safe to swim (or ini this case invest). Even when the flag is green, though, exercise caution.
  • Yellow Flag: When ocean (market) conditions are rough, but not life-threatening, you might see an yellow flag on the beach. A yellow flag indicates potentially high surf or dangerous currents and undertows, and means that swimmers should exercise more extreme caution. If there is a yellow flag, swim only near lifeguards and heed all lifeguard warnings. If you’re swimming with children, or you aren’t a strong swimmer yourself, wear a life jacket when swimming on yellow-flag days. Some beaches (markets) often have a permanent yellow flag because of rocks, a sudden drop-off or a high population of bait fish that attracts predators
  • Red Flag: The most serious of all beach (market) warning flags, red flags warn swimmers of serious hazards in the water. One red flag means that the surf is high or there are dangerous currents, or both. Though you can still swim if there is a red flag, you should use extreme caution and go in the water only if you’re a strong swimmer. Two red flags, however, means that the water is closed to swimming, as conditions are too dangerous for even the strongest swimmers.
  • Blue or Purple Flag: Sharks, jellyfish and other dangerous marine life can turn a fun day at the beach into an unpleasant day at the hospital — or worse. When potentially dangerous ocean animals have been spotted, you’ll see a dark blue or purple flag. These flags fly either on their own or with other colored flags. If you see a blue or purple flag, but the water is not closed to swimming, use extreme caution and keep a close watch for dangerous animals.

Interesting Perspective

I wanted to pass along some interesting thoughts from a good friend of ours, long time subscriber and professional trader.


I also reduced some of my short side hedge exposure this week. Like you, I’m not saying the low is in place, I’m just wanting to bank a portion of my profits and reduce my short-side risk. I’m also a little fearful we may experience a (new-crop 2015) rally back towards $4.00 in the Spring, especially if the market feels it needs to buy a few corn acres. If you consider the “BIG picture,” we had a 1.8 billion bushel corn carryout last year at this time and we were trading around $4.40. This year we are at 2 billion bushel carryout and a whole buck lower at $3.40. Yes, old-crop stocks were tighter last year and some of those wild feed usage numbers were to “restock” the pipeline, which was obviously lower than they (usda) were admitting last fall. Therefore its easier for the bears to argue this year it’s going to be tougher to reduce the carryout. On the flip side, we now have to grow 12-13 billion per year JUST TO MEET demand. That’s a much taller order to fill vs. the 6-7 billion annual consumption during the 1980’s. I’m not telling you anything you don’t already know, but simply I have become a little more careful when comparing current supply numbers to those of the past, especially “percentage wise.” The implications of production and or supply hiccups can become much larger concerns or “real” problems much faster with today’s annual consumption. The market is counting on a 13 billion crop minimum to meet demand and gets pretty nervous at the first hint of problems. Let’s also not forget the overall speed of the trade and how quickly information now travels.

Must Read…Are We Missing Something?

I realize this might sound a little nuts, especially in light of all the bearish commentary, but I’m starting to get the feeling we should be lightening the load and start banking the hedge profits we have realized on the short side.  There are a few things I’ve learned through the years about the markets.  The first is the fact the wheels tend turn the fastest towards the bottom of the hill.  Next is the famous line by Mark Twain, “Whenever you find yourself on the side of the majority, it is time to pause and reflect.”  And of course, one of my all-time favorites…”Every loser in Vegas always leaves the casino thinking he could have done just a little bit better.” I’m not saying the bottom is in place or that we are even within sniffing distance, I’m simply not that good to predict the exact low.  Our original plan was to protect against a fall in price to the $3.50 level and that’s exactly what we’ve done.  The Chinese announcing a new economic stimulus package on the heels of the EU stimulus announcement a couple of weeks back has me wondering if I’m missing something much bigger…  As I sit here today I personally don’t see any major risk or headline that would drive prices dramatically higher for an extended period of time, but then again, GOOD “risk-management” is more about what we DON’T know or see coming our direction than what we do know. In fact that’s truly what we are trying to protect against!  With this being said, I believe the greatest “unknown” has now shifted to the upside…not the down. In other words most ALL of the bearish cards are in clear view and on the table. Therefore I’m making the move to start lightening the load and unwinding the hedges.  I suspect the absolute lows come at some point between now and year-end.  In other words the low comes within the next 45-65 trading days.  As I mentioned above, I’m not nearly good enough to pick the exact day for the exact low, so I’m starting my scale-out process now. Those who are keeping an extremely close eye on their short positions might be able to count to “10 Mississippi” before starting the scale-out process, just don’t get overly greedy! Keep in mind this does NOT mean I’m going long or have become bullish the market, nor does it mean we are exiting ALL of our short hedges.  I just think its time to start more aggressively banking your profits and moving to the sideline.

Stop Waiting For “Clarity”

Just remember as we interpret the headlines and digest the political rhetoric that emotions and knee-jerk reactions rarely produce sound investment decisions. You need to be able to synthesize and distinguish what is actually the “music” and what is simply loud “noise.” In other words….

  • If your looking for “clarity” in regard to Putin…it’s not going to happen. He is in power, he is not going away, and he is going to remain highly unpredictable. 
  • If your looking for “clarity” in regard to the Middle East…it’s not going to happen. They have been fighting for over a 1,000 years and its not going to change anytime soon.
  • If your looking for “clarity” in regard to the US Fed…it’s not going to happen.  The dynamics of the game are constantly changing and they are clearly shooting at a moving target.
  • If your looking for “clarity” in regard to the Chinese economy…it’s not going to happen.  They obviously have their own agenda, so the economic numbers and data released will always be questioned.
  • If your looking for “clarity” in regard to the European Union…it’s not going to happen. There are simply too many moving parts in this machine.  In other words there are just too many countries under one roof ALL with different agendas.

Moral of the story, there is no such thing in the investment sphere as a “perfect world.” You can choose to focus on the “what if’s” and the “doom and gloom” scenarios, but will there every be time when uncertainties and problems do not exist? 

Answering My Mid-Year Marketing Review Questions

Below you will find the answers to my own personal review of my marketing efforts for the first half of 2014. I encourage you to ask yourself similar questions in regard to your own efforts:

What part of my “process” has worked as expected? I am happy to say I have been able to meet most ALL of my “pre-harvest” goals and objectives. My goal was to get close to sold-out in wheat by the first half of 2014 and I have. A bit of this was due to poor production. We had 70% priced at extremely strong levels, with most operations experiencing 30-50% yield losses this basically took us to “sold-out.” My goal was to get to between 50-70% of estimated 2014 new-crop corn and soybean production priced during the first half of 2104. Unfortunately in corn I only got 50% priced. I missed a 10% sale by $0.07 cents when placed my last order at $5.24 vs. the DEC14 contract (got a bit greedy). I was however able to reduce our soybean risk by getting my max 70% priced before the big break. My goal was to have between 20-30% of my estimated 2015 production priced at profitable levels as well. I have in fact been able to price 25% of my 2015 corn; 20% of my 2015 soybeans and 30% of 2015 estimated wheat all at great profit margins.  For the most part I am very happy with our current sales and seem to be right on track. Obviously, with hindsight being 20/20, I should have pulled the trigger on 10-20% more or our estimated corn production.

What has caught me by surprise? The overall lack of a “weather” story. My plan and process generally takes into account some type of weather related rally during the US growing season. The “event-driven” investors have become such a large crowd it’s hard not to figure in a money-flow type move of some sort to the upside during the US growing season. This year’s weather has been almost perfect for a large majority of the belt… This is certainly something I wasn’t counting on when we headed into the season, especially when you consider the trend of the past few years.  This has left me a bit “undersold” from where I would prefer to be with corn.

What changes are implied moving forward? In other words how has the game changed most recently since my last review? Not only has the weather pattern significantly changed (for the better), but so has the dynamics in Chinese policy. The Chinese are getting away from their current policy of storing massive quantities and providing a “price floor” and opting to move more towards an individual farmer subsidy program. This transitionary period has created a unforeseen wrinkle in the sheets. In return US corn cargoes are being kicked and China is currently NOT a threat or in the market for large corn imports. Certainly this dynamic will change moving forward…but when remains my biggest question?

What are the biggest risks moving forward and what could change my mind in regard to these risk? From a producers perspective I am pulling for some type of unforeseen geopolitical ptr weather related risk to hit the market. Perhaps something in the Black Seas region, the South China Sea area or in the Middle East. If crude oil takes off to the upside on greater threats of war I have to believe we get a nice initial knee-jerk bounce in the ag commodities. Remember, it was the announcement by Russia that they were temporality banning all wheat exports in 2010 that turned the corn market around and gave us our first push towards $8.00.  From a negative perspective my biggest risk is everyone else producing a bumper crop, prices spiraling lower and our production NOT be record large.  We need the extra bushels and extra production to help make up for the price break. 

What has now become my overall objective? My newest objective is to get my remaining 2014 new-crop bushels priced. I need to move another 50% of Corn production and 30% of our soybean production.  The only good news is our bins are empty and we have another 12-months to get it marketed. Our early sales and hedges are more than enough to provide cash-flow. I would also like to get another 30-50% of my estimated 2015 production priced within a similar same time frame (12-18 months). As always my overall objective remains finding ways to reduce RISK!

What About Marketing Our Soybeans Now?

I hate to sound like a broken record, but I have been saying for the past six-months, in regards to new-crop soybean production you need to price whatever amount you aren’t comfortable in storing longer-term. For me I pulled the trigger on my final “pre-sale” back on May 20th.  I posted the sale in our “Special Report” to paid subscribers. That cash sale brought us to 70% priced in regard to our estimated 2014 soybean crop.  As most of you know I generally don’t like to get much more than 70-80% of estimated soybean production priced prior to Memorial Day, this year was no exception.  For those who followed our lead way back when, you should still have a small portion of your crop hedged with a floor around $13.00 vs. the NOV14 contract.  This was accomplished back when we purchased the NOV13 $13.00 puts and financed them by selling the DEC14 $6.00 calls.  I know it’s been a long wait, but our patience and longer-term risk-management objectives have finally paid big dividends.  My advise remains the same, but I imagine it will fall on deaf ears, especially if you didn’t follow my lead when we more than a $1.00 higher  just six-weeks back. Price whatever you aren’t comfortable storing longer-term! Remember, we are running a business.  The name of the game remains all about proper “risk-management” NOT predicting price direction.  Manage your RISK and you will continue to be highly successful.