Clearly, times have changed. When it comes to market analysis, we’ve seen a complete transformation. My career began way back around 1980 with Alberta Wheat Pool and its internal publication called Market Update. This publication basically tried to figure out supply and demand tables while keeping tabs of the latest weather forecasts and factoring them into a sort of price balance. The publication originally didn’t make it out of the Calgary head office, but it’s interesting now as proof that a mere generation ago, market analysis was in its infancy and novel to many.
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Since then, markets have become a speculator’s dream — and in some cases a nightmare. The evolution of commodity funds has changed the nature of agricultural markets. Thousands of trades can occur in seconds. Price volatility has accelerated, and everyone involved wants a piece of the action.
But as the trade volume gets turned up, there’s also a lot more of a kind of static that I call “market noise.”
What is market noise? It’s market news that may talk about itself as if it’s important but that really doesn’t affect market fundamentals. Commodity markets can be endlessly over-analyzed. Everyone throws in their two bits worth, with lots of room to spare for exaggerations and at times mis-truths, and in the end it creates a lot of buzz and no real impact. That’s market noise.
Grain and livestock markets are no exception, which creates a challenge for you as a producer. You aren’t interested in the micro-second movement of markets, and it’s important to filter out some of this noise. You want to make a judgment that will best represent a solid risk management decision for your farm business.
Something I have learned over the years is that the law of supply and demand ultimately rules market direction. In other words, fundamentals determine the ultimate market direction, and within this framework, technical analysis offers excellent tools to peg the timing of the entry and exit of a trade.
But another thing I have learned with volatile markets is that there can be more noise than truly useful market information. For example, in the event of a drought somewhere in the world, markets typically overreact to the upside. Speculators pile into the market trying to get a piece of the action. Wild-eyed price expectations flood through the Internet in an effort to draw attention, which they do.
In reality, however, true information about markets usually comes in much smaller doses. Often, supply disasters or demand are vastly overstated. Markets during these violent pricing periods can either soar far beyond their real value or fall below.
From a producer’s point of view, throwing out the market chaff and concentrating on the market grain is an important marketing skill. Always realize that if markets soar, there has to be a buyer on the other end willing to cough up the money.
Remember too that markets can be highly emotional, and remember the golden rule that strong emotions have a short shelf life.
So here’s a thought to keep in mind. If price expectations are too good to be true, they often are. Wild expectations that come to mind over the past year include talk of $6,000 gold and $10 corn. Anything is possible in markets, but market noise is easy to produce.
Grain and livestock futures do spike from time to time. But during these explosive price periods, shelf-life is often measured in days. A key to successful marketing is the ability to price production into these heated speculative-driven market spikes without getting caught up in the hoopla of the sky’s-the-limit price mentality.
The same can be said for markets in collapse. Once the emotions of fear and panic stabilize, the price rebound begins. When market emotion settles down, the reality of true supply and demand fundamentals set in.
My key technical analysis tool is a 15-year-old, broken transparent ruler. Identifying support and resistance lines and watching for trend line breaks is a fairly solid indicator of market direction. I’ve learned over the years to separate emotion from markets. This is an important skill as an analyst.
Market noise can on occasion provide amazing profits for grain and livestock producers, at least for a little while. But it can cost us money too.
Noise is a distortion and it can make or break a speculator quickly. As a business person, stay true to yourself and your operation. You will never sell at the top or buy at the bottom of any market without a good dose of luck. Always remember, when markets are too good or too bad to be true, they are. Let your experience and intuition lead the way. CG
