Since the Tech Guy had booked a commitment awhile back for this evening, there will be no opening calls or Tech Talk from him. But I do want to take this opportunity to share with you what I have learned the hard way about Technical Analysis.
Does the Market Tell Us What It thinks the Carryout Will Be?
The three most important factors in predicting corn, wheat, and bean prices are:
“Carryover” and “ending stocks” are the same as “carryout”.
We need to know:
The current carryout projection from USDA.
What the market thinks the carryout will be.
What we (you and me) think the carryout will be.
It is easy to know what the USDA thinks the carryout will be. Just look at the last USDA S&D issued every month on or about the 10th.
We can all read what all the marketing services, foreign agriculture ministers and commodity groups think the ending stocks will be. You know what you think the carryover will be.
The huge problem is how do we know what the market thinks the carryout will be?
The yield potential of a corn crop can change very dramatically between the middle of May and the middle of July. Heck, one week in July can drastically change the carryout. USDA will not fully report dramatic changes for two to six months.
With exceptionally dry weather in July, you will know the corn carryover is getting smaller, and you will have a much better idea of the carryover change than the USDA’s latest projection.
But what does the market think? If corn futures are going sharply higher, you know the market thinks the carryout is getting smaller, but how much smaller does the market expect? Where does the market think the high price will be? How will we know when the market thinks the high has been made?
A fundamental analyst (strictly supply & demand) can only estimate what the market thinks the carryout will be. He has to rely on his own skills to select a selling price.
Studies have shown that the USDA carryout month-to-month is about 35% accurate. That leaves 65% of the price range each year unknown to the USDA until months after the marketing year is over. In all probability, your best pricing opportunity is long gone by then and prices are below breakeven.
That 65% of unknown information is determined by what the market thinks the carryout will be. Old duffers say the market is always right. I disagree a bit with that because the futures market can be manipulated in the short run by the huge volume of contracts traded by the big money funds. You will see it tomorrow as the funds try to muscle the market to a price that will make most of the March calls and puts expire worthless.
I do agree that the market is always right in the long run. As grain producers, the long run is what is important.
So, if the market is always right in the long run, how can we get an objective handle on what the market thinks the carryout will be?
That, Ladies and Gentlemen, is the reason technical analysis was created thousands of years ago. The market tells us what it thinks the carryout will be through technical analysis.
There are hundreds of different technical analysis systems. Each system speaks a different language. Just as when a person learns to speak one foreign language, it does not mean he can speak all the other languages of the world. And so it is with technical analysis.
Just because one learns the language of Elliot Wave Theory, he certainly will not automatically understand Fibonacci Sequence or Gann Cycles. Each of those systems reveal the market’s opinion just like a person speaking French can tell you the weather forecast the same as a guy speaking German or Chinese or Creole. But which language can you understand?
To learn any foreign language, technical or otherwise, takes a lot of time and commitment.
We must learn one of the languages the market speaks to understand what the market is freely telling us it thinks prices will do in the coming days, weeks, months, and even years.
I have become much more committed to learning the language of technical analysis since the wet 2019 crop year. I have concluded technical information is just as important, maybe more so, than fundamental analysis and the seasonal trend.
I highly recommend you learn simple technical analysis or follow someone who can effectively explain conclusions of their technical analysis. Most technical analysts-for-hire write an impressive summary, but no one knows what they are predicting. Do not waste your money on any analyst that presents a very impressive report, but you cannot easily understand what he expects the market to do.
Yes, learning how to market grain effectively takes time. The most lacking skill of farmers, as a group, is the lack of understanding the language of the market, namely technical analysis. We all need to work on becoming more “Tech Savvy”.
And that is why we brought the Tech Guy on board.