The 5 Key Components of Grain Market Analysis

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Cynics often remark that the key to making a small fortune in futures trading is to start out with a large one, and it’s understandable. Sometimes it seems like a never-ending poker game between bulls always wanting to bet on higher prices and bears always betting on lower ones. 

But here’s a key truth: Whether you’re a farmer with a natural bullish bias or a buyer with a natural bearish bias, the key to winning each season’s high stakes poker game in the grain markets is to shed that bullish or bearish bias.

These five considerations help guide us as we approach grain market analysis in an unbiased way. 

1. “The Fundamentals” – These are the metrics of the U.S. and global supply/demand balance sheets updated for major crops monthly in the USDA World Agricultural Supply and Demand Estimates, known in the trade as the WASDE reports. The net effect of any changes in supply and demand prospects shows up as a change in ending stocks. And for hedgers and traders alike, the key to market impact is the resulting “stocks-to-use” ratio and how it compares to pre-report expectations for change.

2. “Dominant Market Psychology” – This is a reading of current bullish or bearish bias across a host of market analysts and advisors. When professionals are overwhelmingly bullish or bearish, something called “the law of contrary opinion” comes into play. That’s just a fancy term for the old market axiom that says, “the time to get into something is when everybody wants out and the time to get out is when everybody wants in.”

Short of taking a costly poll of dozens of advisors and analysts each week, the best way to assess dominant market psychology is to make a judgement on who’s winning the constant tug-of-war between bulls and bears trying to make their case. A good ag economist can always make both the bullish and the bearish case if competently and faithfully monitoring market news and views. Next, it’s a matter of posting both lists (bullish and bearish) side by side. The list that’s growing longer and stronger reveals the dominant market psychology.

3. “The Technicals” – These are the current appearance and interpretation of trends evident on futures price charts. Are markets in an uptrend or a downtrend? Where’s the next overhead resistance (to further gains)? Where is the underlying support (that might stop a decline)? There are dozens of different approaches (tools) to technical chart analysis and multiple terms for different kinds of formations or even single-day events (like a “key reversal” or “breakaway gap”). Furthermore, nearly all the various technical studies have application to three different types of charts or each commodity:

  1. Daily charts plot the high, low and close for each trading day. They reveal short-term trends in place, over the past 3-6 weeks. Think of daily charts as the 5,000-foot view of the market. 

  2. Weekly charts plot the high, low and Friday close for each week. They reveal intermediate-term trends in place, over the past 6-12 weeks. Think of weekly charts as the 20,000-foot view of the market.

  3. Monthly charts plot the high, low and end-of-month close for each month. They reveal long-term trends in place, over the past 6-12 months (or even longer) and offer the 50,000-foot view of the market.

4. “The Seasonals” – These are composites of average prices, month to month, over the past 5-10 years that reveal the tendency for the strongest prices or weakest prices to occur during different times of the year. You’ll read commentary such as “prices are weakening seasonally” or prices are “firming contra-seasonally.”   5. “Fund Activity” – Beginning in the mid-2000s, the amount of investment fund money flowing into commodity futures exploded. They are like mutual funds in stocks, drawing individual investors who want to diversify into commodities, but who entrust the trading decisions to professional fund managers.

These commodity trading funds come in two varieties: trading funds and index funds. The trading funds will trade either side, long or short the market. Nearly all rely heavily on technical trading systems discussed earlier. Index funds are sometimes called the “long only” funds because they promote their value to investors as a hedge against inflation risk. They are always net long; all that changes is whether their collective position is adding to longs or selling some off.

Fund activity is monitored weekly by the Commodity Futures Trading Commission and reported every Friday. Their activity factors heavily into a weekly assessment of “bullish consensus” by their sheer size. 

The views expressed in this article are the author's alone and not those of Farmer's Business Network, Inc., its affiliates, or members.

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