It was a case of the fundamentalist versus the chartist market view.
And even though both agreed that oat prices are set to rise this winter, the two market analysts offered farmers starkly different reasons why they would.
“This chart is getting set to move up,” said Winnipeg technical analyst David Drozd in a speech to the Prairie Oat Growers Association. He said oat futures prices could soar to $2.48 per bushel based on previous price patterns that can be seen in charts, regardless of the situation of supply and demand.
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“Once they get through, they’re off and running,” said Drozd.
Earlier, analyst Randy Strychar of Ag Commodity Research also predicted higher oat prices this winter, but focused almost entirely on underlying supply and demand fundamentals. With low oat stocks on the Prairies, prices will have to increase to draw them out of farmers’ hands.
“If the buyers want oats, they’re going to have to pay for them,” he said.
In interviews afterward, both analysts noted farmers probably care little about exactly why prices are forecast to go up.
“There’s really only one slide (in the presentation) that anyone cares about, and that’s the price projection,” said Strychar.
But at other times understanding the difference between the two schools of analysis is essential for a farmer trying to find a comfortable approach.
Fundamental analysis in commodities is based upon supply and demand, with analysts putting great value on stocks-to-use ratios, carryover numbers and production and consumption estimates.
These are seen as the fundamentals of the commodity.
Prices can be predicted by understanding how tight or loose the forces of supply and demand are.
Technical analysis, on the other hand, often ignores supply and demand, relying instead on charts of price and trading volume actions.
To technical analysts, even considering supply and demand fundamentals is an act of arrogance in which the analyst improbably assumes that he can come up with a more accurate price forecast than the millions of other market participants who have already determined futures market prices.
Unless an analyst has crucial exclusive information about the commodity, trying to outguess the market is a fool’s game, say technical analysts.
Better to stick to analyzing charts, they say, because charts reveal patterns, and patterns are a lot easier to analyze and offer more accuracy in forecasting.
“These patterns develop because people keep doing the same thing,” said Drozd. “History often repeats itself.”
But to the fundamental analyst, putting huge stock in charts divorced from supply and demand is like reading the entrails of a sacrificial animal.
“They can be guidelines, they can be tools, but they can be very dangerous,” said Strychar.
“They can be very wrong.”
On this Strychar and Drozd were agreed. Drozd said he thought he saw a major bullish formation on an oat chart last year Ð known as a double bottom Ð and he expected a price surge. The double bottom became a triple bottom and prices did not take off.
But Drozd thinks the oat chart analysis will still pay off and may be bigger because of the delay.
“The farther a market moves sideways, the farther it goes up when it pushes through the resistance,” said Drozd.
But to Strychar, ignoring supply and demand makes no sense when forming a marketing plan in the real world: “In the long run he’ll probably be right, but in the short run, who knows?”
Strychar does not ignore technical analysis. He finds the “seasonals” often offer price increases during certain times of the year, as in the winter, and declines, as during harvest.
And he will check the technicals when deciding on precisely when to buy or sell a commodity.
“I watch trend, support and resistance, but that’s about it,” said Strychar about three broad measures of market action. “The only reason we watch the technicals at all is because (we want to understand the likely behaviour of) the commodity funds and the speculators.”
But to Drozd, the technical indicators offer far more than simply a trigger point for a decision based upon fundamental analysis.
Often the action of prices and supply and demand diverge greatly, and if you’re not watching and analyzing the charts, you can be caught unawares.
“If you’re really just focusing on the (impact of supply and demand on price), often it doesn’t make any sense,” said Drozd.
