So you want to trade the grain markets, do you? Better be on the right side on grain report day… or you could end up like the Dukes from Trading Places. It was just yesterday that the CME group magazine Open Markets was explaining how USDA reports influence ag markets, and boy did they have good timing – with today’s report bringing the most volatility we’ve seen in quite a while on a report day:
Charts courtesy Finviz.com. Disclaimer: past performance is not necessarily indicative of future results.
Corn went limit down, selling off the maximum allowed amount of -$0.40, and every other grain market – wheat, soybeans, even rice and oats – took a dive alongside it. We’re talking an increase in volatility of about 250% based on the 41 cent range 2.5 times higher than the 11.7 cent average range over the past 20 days. We’re talking a day’s move essentially taking out a month’s worth of gains. No, ladies and gentlemen, grains aren’t for the novice trader or investor.
Why the sharp moves lower? The report revealed that plenty of old crop corn is on the books: 5.4 billion bushels compared to the estimated 5 billion. Compounding the effect is the news that planting intentions for corn & beans remains near record highs:
Corn growers intend to plant 97.3 million acres of corn for all purposes in 2013, up slightly from last year and 6 percent higher than in 2011. If realized, this will represent the highest planted acreage in the United States since 1936 when an estimated 102 million acres were planted.
Soybean planted area for 2013 is estimated at 77.1 million acres, down slightly from last year but the fourth highest on record, if realized. Compared with 2012, planted area is down across the Great Plains with the exception of North Dakota. Nebraska and Minnesota are expecting the largest declines compared with last year, while Illinois and North Dakota are expecting the largest increases.
A few more things come to mind here:
- What the heck were they doing with all that corn in 1936 when the record for planted acres was set? That was before ethanol, high fructose corn syrup, and 10 gallon tubs of popcorn at the movies – and when the world population was about 30% of what it is today.
- What do long only commodity investors (CORN) think of this type of information? Do they just think, “it doesn’t matter, corn is still going up,” or is their logic more like “we know there will be ups and downs in the commodity markets, but timing them is hard, better to just stay long and ride out the down periods.” The first is just silly, though the second seems a little less so.
- How is any normal human supposed to weed through all this acreage, old crop, new crop, frost, drought, Chinese demand, Russian supply, North Dakota, Nebraska nonsense?
- Even worse, how is a computer algorithm supposed to interpret all of this and do something about it in the midst of prices falling 5% in minutes?
The last three items are no doubt why the Ag Trading strategy remains a part of the managed futures landscape, and why it remains mainly run by discretionary traders. There’s a high level of skill associated with being able to “read” the state of the industry ahead of such releases, perhaps the biggest of which might simply be getting out of the way, and there remains a part of this strategy which is more art than science.
We don’t yet know how today’s action treated most of the Ag specialists we work with (several trend followers were on the wrong side), but we’re pretty sure they have a healthy dose of respect for the risks and rewards present on the USDA report day. For them, the fun part starts now – analyzing the report, checking their sources, putting their hands in the dirt to come up with their next trade in the grain sector.