Remember when you were a kid and you wondered how high you could make that swing go?
If you really laid back and pulled forward on the chains with all your might and kicked out your legs, you might end up equal to the height of the swing set’s central bar and perhaps a bit higher.
The problem with that was you would be weightless for a brief moment of euphoria and then drop down in a way that could jar you out of the seat and slam you into the sand.
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Green lentil market oversupplied
Farmers in Western Canada can expect price pressure on their new crop of green lentils, as the available supplies among the world’s major lentil-growing nations increase significantly.
That’s the kind of unsustainable arc that some market analysts watch for in commodity markets – where prices begin rising at an ever increasing angle, eventually going almost vertical.
Usually, after a rise like that, prices don’t level off and stay high. They come tumbling back down.
That’s what happened to wheat in March and corn and soybeans in early July. In retrospect, the unsustainable arc is visible now, but was it then?
Tim Wood, a Dow theory specialist, believes it was.
However, the publisher of the Cycles News and Views newsletter says it would have been necessary to be studying long-term charts. If not, this “parabolic advance” would have been invisible.
Many farmers, brokers, advisers and analysts study run-of-the-mill “daily” charts of futures contracts to look for price patterns.
These charts provide about 31/2 months of price history. Some look at “weekly” charts, which show about a year and a half of prices.
However, few people look at “monthly” charts, which provide three years of data and would provide more if contracts were long enough.
The charts show a stunningly different story about wheat prices this year, a difference that could have led producers to adopt substantially different hedging strategies, depending on what they were viewing.
The daily, short-term chart shows wheat moving up steadily, with a big spike at the end of February, a decline into early March and then another big spike.
The spikes seem exciting, but not necessarily signs of an impending major reversal, because they don’t fall back below the advance line.
The weekly chart shows a steady advance with the two spikes, with each spike still appearing to be a deviation from an ongoing, predictable advance.
However, the monthly chart shows a different picture. On it, the advance of wheat isn’t a straight trend line up but an arc that in late February and March had almost gone vertical – clear signs of the kind of parabolic advance that tends to lead to tumbles.
Producers who study the monthly charts would probably be doing aggressive price protection hedging in case prices suddenly collapsed. They would have sell stop orders placed somewhere under that trend line.
By looking at the weekly or daily charts, which most people do, they would have probably been more relaxed about the situation – and caught out when the market suddenly collapsed.
“You have to back up far enough in order to see it,” Wood said.
Occasionally, long-term price graphs are worth looking at.
Parabolic advances and declines happen rarely – often with decades between them – but if once every few years you capture almost all of a crop’s advance and avoid most of the decline, you’ve been more than paid back for the time it took to give the markets a long look.
