The Three Sons Meet the Three Little Pigs
By Darin Newsom DTN Senior Analyst
Once upon a time, a successful farmer had three sons. Thinking equally of them in regard to their abilities, he gave each of them the task of marketing some of his grain, with the warning that the big, bad market bears would soon be out looking to take his fortune.
The first son was always attracted to things of high reputation, regardless of whether or not that standing was still warranted. Having first choice, this son automatically picked his father’s corn to market. The second son, a red-headed lad, was quiet and often overlooked when in the company of his two brothers. He was thoughtful, and understood the struggles of gaining attention. Naturally, this son chose his father’s wheat to take care of. The third son had the personality of a smart gambler. He analyzed carefully and once his mind was made up, would not be swayed by the slings and arrows of everyday nonsense. His ability to stay focused on the big picture made him a natural to handle his father’s soybeans.
The first son was elated! In his charge was one of the kings of commodities, complete with its own palace (in Mitchell, S.D.) and that minstrels would one day write songs about. Analysis showed the structure of corn to be weak, with the ongoing long-term downtrend indicating continued pressure from the investment side of the market while the strong carry in the futures spreads reflected a long-term bearish view of supply and demand. Despite this structure that showed the market could fall, that showed selling futures and using the carry in the spreads to his advantage while holding the corn in a strong storage facility and waiting for basis to appreciate was the way to go, the boy decided to just hold onto it unprotected. After all, corn had been strong since 2006, so there was no reason to think the bears would come for him now.
The second son realized that because wheat was a global market, with harvest going on somewhere in the world almost every month of the year, rallies were likely to be short-lived and should be viewed as pricing opportunities. The structure of the wheat market was tenuous at best, given that noncommercials (investment traders) were often comfortable selling more contracts than they bought, and that bullish fundamentals were fleeting. In regard to the latter, the ongoing struggles with variable storage rates made it almost impossible to tell how bullish or bearish the supply and demand situation actually was. For these reasons, son number two knew he had to have an escape plan for when the bears returned, knowing full well they would return.
The third son checked his charts and tables, and saw nothing but bullish signs for soybeans through the following summer. Yet, his Twitter account was filled with chatter trying to coax the bears out of hiding. Even his friendly government, recently returned from an unplanned vacation, was in on the game, calling the bears out for a feast. Yet, son number three understood he was looking at a market with a bullish structure, given the inverted forward curve (series of futures spreads from November through July) and signals of a long-term uptrend. Global supplies simply didn’t exist to meet demand. And the rebuilding of those supplies might not be fully achieved until after the South American harvest next spring. With that in mind, and ignoring most of the noise surrounding the market, he decided on a plan of selling small amounts of soybeans into this bullish market structure, as long as spreads stayed inverted. For an inverted forward curve usually goes hand in hand with a strong basis market, meaning the best course of action is to have cash grain to sell. Then, by the time the bears did return to soybeans, he would have only a small amount, if any, still being held in storage.
We all know what happens in the classic tale. In this case, it is easy to picture a wolf (or in this case, a bear) easily knocking down corn’s flimsy market structure, making a quick meal of the unprotected son number one. He could have fortified his position, as mentioned above, but chose not to for reasons known only to him. The second son’s plan of selling wheat when opportunities presented themselves due to his market’s shaky structure, could be like an escape tunnel out of the city and keep him from being yet another meal for bears. The strong market structure in soybeans the third son has to work with basically gives him a house of brick to withstand the blustering bears — for now. At some point this house could fall, like the others, though his sound marketing strategy could again leave bears with nothing to dine on.
Darin Newsom can be reached at firstname.lastname@example.org
Courtesy of dtnprogressivefarmer.com