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Commodity Market Analysis

Anyone seeking to sell anything wants to sell as near the top of the market as possible, or at the least, avoid selling in the bottom half of the annual price range. Thus, seeking to accurately and consistently predict when a market will top, when it will bottom, and at what price is the “Holy Grail” of commodity traders. This includes farmers, regardless of whether they trade futures or not and regardless whether they are buyers or sellers of physical commodity.

If a farmer never has and never will trade a commodity futures contract, why is predicting the top and the bottom of the market so important? The net cash price a farmer pays or receives for grain is determined by the basis and the futures price. The futures price is the value the world marketplace has determined a grain to be worth at any specific moment. The basis is what the local marketplace has determined the local cash price for a grain should be, relative to the world market price.

Accurately predicting what the futures market price and the basis market price will do and when they will do it is just as important as producing the commodities as far as the bottom line on the farm profit & loss statement is concerned.

To find the Holy Grail of price predicting accuracy, two distinctly different methods of market analysis were developed hundreds of years ago, perhaps even thousands of years ago. They are Fundamental and Technical Analysis. Everyone whose livelihood is remotely determined by the price of commodities, does an analysis to some degree, and uses one or both of these two market analysis methods. But always remember this simply stated fact:

No one knows which way the market will move.

There are people who know a hundred times more than you do about market analysis… even a thousand times more… even a million times more than you do, but do you know what? No one knows what the price of a commodity will do tomorrow, next week, next month, or next year.

Never forget this absolute certainty about commodity price forecasting. Thus, a risk management plan goes hand-in-hand with a grain marketing plan.

Fundamental Analysis

Anything which directly or indirectly affects the supply or the demand of a commodity is a fundamental factor.

There are the obvious factors. On the supply side: acres planted, yield, acres harvested, acres abandoned, current weather, weather forecast, soil conditions, crop conditions, etc. On the demand side, we also have the obvious factors: livestock numbers, exports, commercial use, seed use, etc.

Some of the not-so-obvious fundamental factors are exchange rate of the dollar, price ratio of soybean meal versus corn, ratio of the price of corn to the price of beans, corn price versus wheat, bean price versus wheat, bean price versus cotton, government farm programs, foreign and domestic tax rates, tariffs, government subsidies, world economy, economies of primary export-buying countries and export-producing countries, etc.

In theory, the quest of fundamental analysts is to obtain “perfect knowledge,” which is knowing every last tidbit of any and all supply-and-demand factors up to the present moment. This, if you think about just for a minute or two, is absolutely impossible. Thus, all fundamentalists do their best to predict market action with “imperfect knowledge,” but there is a huge variance of degrees of imperfect knowledge among fundamental analysts.

Without a doubt, the internet has done more to improve the overall ability for everyone to vastly improve their degree of fundamental, but still imperfect knowledge - not only because of the vast information on the internet, but the speed with which it can be delivered to the ordinary person.

The largest source of fundamental agricultural commodity market information in all the world is the United States Department of Agriculture (USDA), followed by the Central Intelligence Agency (CIA). Surprised? Food supplies, or a lack of them, have caused more wars throughout history than anything else other than religion!

Technical Analysis

Technical analysis is a method of analyzing and forecasting prices of stocks, bonds, futures contracts, indices, or other financial instruments using only non-fundamental information. As with fundamental analysis, the goal of technical analysis is to predict future price action of a commodity. Technical analysis does not explain why prices behave as they do (fundamental analysis does), but simply predicts the future price action.

The working principle behind technical analysis is that any and all fundamental factors influencing the market are already reflected (discounted) in current price. Thus, the price action of that commodity month-by-month, week-by-week, day-by-day, minute-by-minute, and even trade-by-trade is the best indicator of the summation of all known fundamental information.

Followers of technical analysis believe that:

1) all prices move in trends, namely: uptrend, sideways or down

2) history does repeat itself over and over again

3) the market discounts (prices-in) everything immediately

Technical analysis involves the use of charts of price action, trading volume (number of contracts traded), open interest (number of contracts on the books) and dozens, if not hundreds, of other non-supply and demand factors. Chart data is supplemented by mathematical indicators such as moving averages, relative strength, stochastic, bullish consensus, etc. There are more than 660 different technical analysis systems. My attitude used to be they pretty much cancelled each other out. For the most part, I still think that way. However, I have learned some technicians have it pretty well figured out. I particularly like the chart formations that indicate a trend change.

In November 2018, Alan Bonifas, farmer/technician in Southeast Nebraska, told me the low on corn and beans in 2019 would be May 10th. I was respectful and wise enough not to be critical, but given how the seasonal trend was up all spring, his prediction, while certainly possible, was not reasonable.

The low for corn and beans in 2019 was on Monday the 13th of May. He missed the low day by one business day. He made the counter-seasonal prediction six months in advance! Just think about how amazing that is!

In early December 2019, Alan told me that the corn and bean low in 2020 would be the last half of April followed by a major rally into the fall with a major high in late September. Keep in mind he was telling me this in December 2019!

I kidded him with, “Come on, Alan, aren’t you going to tell me what day the low will be made?”

He replied with dead seriousness, “I just don’t know. I can’t get my cycles to see it.” I was ashamed of myself for making a joke about something he was so dead serious about.

Get this: the low in 2020 for corn and beans was April 21st. He predicted a counter-seasonal low four months in advance of when it happened. Two years in a row. If that does not make one respect technical analysis, then nothing will.

In the middle of July 2020, crops were looking pretty good. Alan called me and I asked him, “Does your cycle work still predict a rally into the late September?”

He replied, “Yes, it does, but I just can’t see it happening. I have gone over this technical analysis step by step a dozen times, and it still predicts a major rally of corn and beans into late September. But I just don’t see it happening. We are looking at record corn and bean yields and the weather forecast looks great. I think my system has let me down.”

I told him, “Don’t be so disappointed. Look at what your system has already done for you the past two years alone! Nothing is 100%. If it was, we all would be rich.”

Do I need to remind you December 2020 corn went from $3.20 August 4th to $3.86 on September 30th and November 2020 soybeans went from $8.65 on August 10th to $10.46 on September 18th? Both were on their way to seven year highs.

Some proponents of fundamental analysis say technical analysts are lazy, that a technician would rather spend several minutes a day looking at a few charts than to attempt the never-ending task of finding and analyzing fundamental information from around the globe in search of the Holy Grail of perfect fundamental knowledge.

In contemporary language, one would say technical analysts are nerds and fundamental analysts are macho. Certainly, technical analysis is an intelligent thinking man’s game, whereas fundamental analysis is more of a “Just the facts, Ma’am” approach. There are plenty of lazy analysts all across the analytical spectrum. However, for certain, some technical analysts work harder and longer than any fundamental analysts I have ever known. The results of either analysis is dependent upon the amount of effort put forth to do the analysis and the never ending search for improvement.

I personally have developed a much greater respect for technical analysis the past two years.

Technical analysis is the language the market uses to tell us what it (the market) thinks the carryover is getting bigger or smaller or just right. When it is all said and done, it is the carryover that determines the price.

But always remember this simple fact: No one knows which way the market will move.

A fundamental analyst has to estimate what the weather will do in the coming months and, obviously he will often be wrong. A technician is looking at non-fundamental factors that predicts future price action based upon what the past price action was. A technician does not care what the change the weather may have or what politicians will do. His technical system has already factored those unknowns into the analysis matrix.

The key is to find a technical system that works and a person who knows how to read it. I am sure there are many technical systems that work, but I am also certain not all 660+ of them work for grain and oilseeds.

You can learn it yourself, but you must be willing to put in the time. It can take months or years, depending on how much time you are willing to commit to learning the system.


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