We hope you all had a wonderful holiday season! As we all enjoyed our post-Christmas glow, we started wondering how much time marketers like you have to relax post-holiday before gearing up for market opportunities. We looked back at the corn market over the past 20 years post-Christmas through the first half of each year, roughly through the busy days of planting. We also looked specifically for rallies that hit 10% or more. And what do you think we found out? The markets don’t tend to take a break, and we all need to be prepared for potential market action.  For instance:

 

• In 18 of the last 20 years, the markets have offered one (and only one) rally of 10% or more through the first half of the year.
• Six of those 18 rallies—a full one third—started before the end of March.
• Of those six, one started up right after Christmas.

 

In other words, we don’t have the luxury of waiting to start planning for 2024 pricing opportunities.

This begs the question—what’s your plan to capture a planting season rally in 2024? Or to rephrase that, how are you going to methodically approach the opportunities the market offers vs. letting the emotions of the market steer you?

 

Consideration 1: Rallies can start and end before you know it.

 

Based on data back to 2004, there are only about 33 trading days, on average, from the bottom of the market rally to the top, with a range of 3 days to 72 days. (The averages referenced here do not include 2012, which we’ve excluded from our calculations as an anomaly.) Does that seem like a lot of time to make smart sales? Perhaps, yes, if you’re watching the markets all the time. However, think about what you’re doing the first half of the year. You’ve moved on to all that is planting. Also, it’s important to bear in mind that you often don’t know a rally has begun until we’re well into it. The market could be rising slowly over a long period of time and then suddenly fall apart, leaving you flat-footed.

 

Take a look at the chart below, which outlines the time it takes to get to a market high (in blue) and the time it takes to then return to the original low (in orange) by year. Let’s focus first on the blue—the rallies. As the chart details, the number of trading days to the high have ranged from 3 (!!) to 72 days. Regrettably, there’s no formula that can tell you how long that rally is going to last, and you need to be alert for those instances where the rally is short and steep.

Consider 2023, for example. The 28% rally started on May 18 and ended 22 trading days later. What were you doing during that time? Did you have a lot of capacity to stay on top of the market, given what you needed to do in the field? Also, bear in mind that this was a decent-size rally. Were you tempted to wait and see if you could capture more, or even the top of the market, then missed the rally altogether?

 

Consideration 2: The return to the low can be even faster.

 

For argument’s sake, let’s say you missed a rally. Unfortunately, the average sell-off back to the original low is only 22 trading days, and a range of 6 days to 70 days. To that point, take a look at the chart referenced above by focusing on the orange bars representing the number of trading days from the high back to the original rally low. You’ll note that in about two out of three times, the rallies were longer than the decline back to the original low. This makes sense. You may recall this past August when we talked about selling behaviors of farmers (in Managed Money Part 1: What Has It Done for You Lately? August 2023). Farmers, as a whole, tend to sell in a rising market (often slowing down a rise in price) and also tend to sell in a falling market (accelerating a decline in price). Thus, prices tend to rise more slowly than they fall.

 

What does this mean to you? You usually have even less time to capture opportunity on the way down than the way up. You need to be alert or have a plan in place for those times that life doesn’t allow you to pay attention to the market.

 

Let’s go back to the 2023 example we just discussed. The market moved up in 22 days and back down in 8 days. Eight trading days is only a week and a half. Think how easy it is to rationalize why you should wait vs. sell during that time. Maybe you were still in the field, and you simply couldn’t tend to marketing during that timeframe. Perhaps you just wanted to see prices edge back up a little bit before you made a sale. Perhaps you thought you simply had more time. Whatever the case, the market didn’t give you a lot of time to take action.

 

Consideration 3: Sometimes, it pays to be patient.

 

Yes, rallies can be quick, and they can also be slow. Take one last look at the chart we’ve been referencing above and note how long some of the cycles took from market low to high and back to the original low. The year 2004 stands out with a 72-trading day rally and a 70-trading day decline. More recently in 2022, there were 55 days to the top and another 33 days down.

 

As much as we caution you from not taking action quickly enough, we also need to caution you to take care not to sell too much too quickly and miss the bulk of a rise in price. The last thing you want to do is to sell your grain early and then watch prices rise without a plan in place to protect your sales.

 

Consideration 4: Fundamentals are great at explaining what happened; less good at forecasting what will happen.

 

In our recent discussion on the impact of expectations on price (In Search of Great Expectations, December 2023), we discussed how the market reflects expectations of players in the market. The players have to make decisions based on known information, and the market only reacts, on balance, to new information that CHANGES expectations. The types of information that might trigger a rally or decline include geopolitical disruptions, weather in the U.S. or South America, or unforeseen supply or demand changes by the USDA.

 

Let’s revisit Ukraine as an example, this time in context of corn. In this case, it’s important to bear in mind that wheat and corn markets are often inter-spread. Thus, extreme movements in one market often spread to the other. This makes sense, as each serves as a substitute for the other. As one gets too expensive, buyers tend to switch to the other. Back to Ukraine: in 2022, prior to the Russian invasion, the global market had already absorbed the expected wheat production from Ukraine. Post-invasion, it was unknown whether any supply from Ukraine would be available. Wheat prices soared as grain merchants needed to meet existing sales commitments, and players in the market turned to corn as an alternative. As a result, corn rose 33% over 55 days.

 

This explosive change happened because the new information meant that players in the market had to change strategies already set in motion. Merchants had to meet obligations. Buyers had to find wheat substitutes. Corn was suddenly in higher demand. The Ukraine invasion upset plans and the market reacted accordingly. Yet, how long did it then take corn to return to the original low? Only 33 days during an ongoing war. Again, it took only 33 days for the market to absorb the information—now old news—into ongoing expectations. Anyone holding out because they thought the ongoing war mattered lost their chance to capitalize on the opportunity.

 

What, then, are you supposed to do?

Make sales like a hedge fund.

 

At this point, you’ve seen that you really can’t anticipate the behaviors of a rally and decline. You may be frustrated, wondering what you can do. Think about using an approach that removes emotions from your decision-making and instead relies on a systematic approach, much like how a hedge fund approaches its own buying and selling decisions.

 

The mentality of a hedge fund is simple—methodically reap profits without taking on too much risk. They don’t spend a lot of time speculating on market news. Instead, they set buy and sell targets and use market data to adjust their targets accordingly. Let’s outline how this can work for you with tools at your disposal.

 

• Use open sell orders at incremental predetermined levels that represent resistance (congestion) areas that are beneficial to your bottom line. (Don’t get greedy! This often leads to poor decision-making.)
• Use stop orders and adjust them accordingly as the market rallies. This will help maximize profitability by minimizing missed sales opportunities.
• Puts typically gain value as prices move lower. Buy put options to give yourself some downside coverage without the commitment of a sale (futures or cash).
• Calls typically gain value as prices move higher. If the market is particularly violent and volatile, use call options to protect existing cash sales from higher prices and gain confidence to sell more bushels at higher prices. (This strategy can be used in conjunction with owning put options because the level of uncertainty can cause either one to pay off—sometimes both.)

 

For more information on stop orders and how they can be an integral part of your strategy, see Selling When Prices are Down, February 2023.

 

We Can Help.

 

At Total Farm Marketing, our consultants spend 100% of the day focused on the market, allowing farmers like you to focus on the job of farming. Talk to us about setting up a plan that can help you capture the highs, avoid the lows, and build a strong weighted average price.

 

Call us at 800.334.9779.

 

©January 2024. Total Farm Marketing. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices may have already factored in the seasonal aspects of supply and demand. The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Reproduction of this information without prior written permission is prohibited. This material has been prepared by a sales or trading employee or agent of Total Farm Marketing and is, or is in the nature of, a solicitation. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing refers to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. SP Risk Services LLC is an insurance agency and an equal opportunity provider. A customer may have relationships with any or all three companies.