It’s impossible to get any clear sense of direction from the ag commodity markets these days. Perhaps it’s always a crapshoot trying to call ongoing trends when they’re happening, but after a 2008 in which crop prices went far higher than even the most bullish prognosticators called for the year before, and after a collapse that went further and faster than anyone at the peak expected, calling 2009 seems a fool’s game.
But longtime traders and market historians have, for the past few months, been offering interesting observations for months on how commodity markets tend to behave in periods of great instability, and while these types of analysts don’t like to get pegged down on short term price projections, they’re willing to make gutsy long term forecasts of degree.
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Most of the longtimers seem to agree that we have entered a period of great instability, and that’s a good thing for people – like farmers – trying to make money from selling commodities. Yesterday James Bower of Bower Trading in Chicago, a commodity brokerage business, said he’s certain the wild swings in market prices are going to continue. (See previous post for more on his views.)
“It’s going to be very, very volatile,” he said. A lot of farmers saw potential profits collapse along with the collapse in ag commodity futures prices since midsummer (if they hadn’t locked in future sales prices, which they had lots of opportunities to do), but an explosively volatile market in 2009 could offer substantially higher prices on any weather scares.
It’s been a long time since farmers have lived through a market this volatile, but they do offer lots of good pricing opportunities – if you’re willing to take them and not holding off for canola to hit $1,000 a bushel. (I doubt anyone was waiting for $1,000 canola, but there were some guys – I’ve spoken to a couple – who were waiting for $30 canola to inevitably appear. Perhaps it might, sometime, but not in 2008.)
The reason Bower expects the crop markets to be capable of big swings is because of the psychological damage that the rise and then the fall caused to people on either side of the market. If you look at the market as a person, or as the buy-side as a person and the sell-side as a person, you’re probably going to see signs of trauma as we go forward.
“They got up so high and so many people took for granted that prices were always going to go up. They were totally caught off guard when it came off. If you are a true commodity trader you have to recognize that the market will go down almost invariably three times as fast as it went up,” said Bower.
That’s why things will go “tubular” from here for a while, he thinks. (He’s not using 1980s-vintage surfdude language, if you’re getting visions of Spicoli at this point.)
Bower expects commodity prices to move within some sort of range, but it’ll be a really big range.
“After a market’s made a bold move and then moved down, technically it will make a bottom and then it tends to go in what I call a tubular formation or a nesting formation – in other words, the market will ratchet up to the highs, fall back down. That’s the healing process that normally takes place after a market has been wounded very, very badly.” This big range between highs and lows is the tube.
If that’s the future, and this guy’s right, it’s not such a bad future to be going into. Volatility can make people feel sick, because it’s hard to keep selling if prices keep going up after you’ve made sales and it’s hard to sell if prices plunge below what you could have sold at a week or a month ago – but for those with the guts to actually execute on a marketing plan, spikes that make it even halfway back to the 2008 peaks offer great profit potential.
But if there is a next time, in terms of prices going up dramatically, it’d be good if more farmers found the guts to sell and take advantage of them. 2008 should have schooled farmers in the necessity of making sales even when some analysts are making the most bullish projections. If you put 2008 in your rearview mirror, keep glancing in it as we head through 2009, because if things go tubular, you’ll need to remember you can zoom up the sides, but you’ll always come back down in the end.
