Tuesday, May 04, 2010
Marketing Crops Fundamentally And Technically
At what point in your marketing plan do the fundamentals begin to work with the technicals? Supply and demand push price action in one direction and the technical aspects of the market determine how fast and how far that direction will go until it begins to turn around. The current corn market has shown recent volatility, the direction has turned, and it may be time to match the market fundamentals and with technical marketing strategies.In his weekly newsletter University of Illinois marketing specialist Darrel Good outlines the parameters of the volatility, which has taken December corn futures from a $3.95 high in mid-April, then down to $3.67, before returning to the $3.95 mark. Currently the price is 40 cents above the September 2009 contract low and 75 cents below the June 2009 high.
Fueling the bearish side of the market has been increased supply due to favorable planting weather, increasing acreage expectations, and a yield above the trend because of early planting. On the bullish side of the market has been increased demand for corn from growing ethanol demand, as well as higher livestock prices that would tend to increase production and subsequent feed demand. Additionally, recent Chinese purchases have headlined strong export demand. Darrel Good says the tussle between larger supplies and larger demand will result in a wide trading range for corn prices. And he adds that “if improved demand is confirmed, there may be less downside price risk and an opportunity to move back to recent highs if crop problems develop.”
With those thoughts, your challenge as a marketer is to look at the trend in the market (“the trend is your friend”) and determine some upside price objectives until the market turns downward. Those upside price objectives are the subject of the new marketing newsletter from Iowa State University farm management specialist Steven Johnson. He says many commodity traders will not only look at supply and demand statistics, but the buy and sell signals generated from a variety of technical tools in the market. Among those are some ratios developed by a mathematician named Leonardo Fibonacci. Without going into detail, he says once the trend is established in a grain contract, such as December corn, the distance between the trough and the peak in the price action can be divided into objectives at 38.2%, 50%, 61.8%, and 100%. For example, as an uptrend retraces the prices of the last downtrend, those points will become important price objectives.
Johnson says from the $4.52 high last November to the April low of $3.75, those four price objectives can easily be calculated:
38.2% = $4.04
50% = $4.13
61.8% =$4.22
100% = $4.52
Johnson says December corn will have strong support at $3.75 and it would take significant changes in larger supply or less demand to drop below that support price. However, the price objectives will serve as a ceiling or resistance levels until the market price is able to close above that level. And to push through those levels would take strong fundamental news that would be larger demand or smaller supply. Johnson is not sure that corn prices will push above those levels because of the soft global economy. But once above the $4.04 market, move your sale objective to the next level higher.
Johnson says such price objectives can help trigger sales and take some of the emotion out of trigger pulling when selling grain.
Summary:
Strong fundamentals are pushing and pulling on corn prices and currently increased demand is overshadowing the potential for a larger crop this year. As long as prices are trending higher in response to the demand, marketers must decide at what points to make sales. One strategy is the use of ratios that indicate how much the retracement might be. Putting price objectives on those points is a method of marketing discipline.
Posted by Stu Ellis on 05/04 at 01:02 AM | Permalink