Trade wars = Volatility
Turn off the news. This should be a “normal” year , says Richard Brock. Here's his viewpoint on the matter.
By Richard Brock
Most likely very few people would agree with me that the last three months of price volatility have been fun. None of us like seeing weakness in the stock market that drives down the value of our retirement funds nor the volatility that has occurred in grain and livestock market. But that is all part of the business we are all in.
In the late 1970s Forrest Mars, founder and owner of Mars Candy, Uncle Ben’s Rice, Kal Kan Dog Food and numerous other companies (he was already a billionaire then) hired me to be his personal commodity consultant. It was more of an educational experience for me than I was of help to him. He taught me some very important concepts when it comes to commodity marketing. The most important are the three factors that anyone in the commodity market absolutely has to know to understand the market. Those three factors are:
1. The Fundamentals. Know how to put together a balance sheet whether it be corn or cocoa. This is where you start with an expected average price.
2. Know the rules of technical analysis. He was adamant about knowing how to read a bar chart and the bar chart rules. In today’s world that is a lost science. It still works.
3. Understand human nature. People get emotional in markets. The vast majority are bullish at the top and bearish at the bottom. In my 50 years in this business, that has never changed.
Understanding how people react and overreact has made the last three months of these markets relatively simple. Over time markets change. People NEVER do.
We are at a stage now where everyone is wondering whether Trump’s plans on tariff negotiations are going to work. It’s disappointing the split amongst people who want him to be right and those who do not. Many Democrats are rooting against him and hope the economy goes in the tank. They just want to prove him wrong. On the Republican side, two weeks ago people were having their doubts. They want this administration to be right, but the market was making everyone nervous. When that happens, emotions will pull people out of the market and prices will go down.
Starting the third week in February grain prices were overpriced relative to the fundamentals and two weeks later the market had taken care of that. Now as this is written grain prices have boomed back to the upside and are challenging the highs established in February.
Keep a Level Head
The fundamentals of the grain and livestock market have not changed. Exports of agricultural commodities have yet to see any significant impact. China doesn’t buy hardly any corn from us anymore. The sales of soybeans to China for this year have for the most part already been shipped. Soybean producers may feel a pinch on new crop exports. That has yet to be seen. People and animals still need to eat.
Corn and soybean prices have bounced back to about the same value as the highs made in February. Based on average yields, both commodities are now priced about where the balance sheets would indicate they should be. Both corn and soybeans are now entering a weather market. The southeastern Corn Belt has received enough rain in the last 10 days to equal the average annual rainfall. No question those areas are going to see delays and the rest of the Corn Belt has been colder than normal. Everything is behind.
On the other side we all know that when the weather does clear, with today’s advanced equipment in 10 days a crop can be put in the ground. No need to panic yet and assume that this market is going a lot higher, but the volatility will keep everybody on edge.
Buyers of corn and soybean meal should be aggressive. Worldwide supplies of corn are low. Will not take much in the form of bullish fundamental news to push this market considerably higher. Soybean acres are down substantially. Even though we have basically handed the worldwide soybean export market to Brazil, domestic demand is still very strong and should be supportive to soybeans in the $10.50 to $11.50 price range.
Turn off the news. This should be a “normal” year.
Richard Brock is with Brock Associates.
