Monitor the trend of carryout vs. the trend in prices, analyst says
When it comes to trying to outguess the price direction of any market, by many accounts it's a near useless endeavor.
There are multiple variables that may need to be analyzed and, at any one time, one or two may stand out as the most obvious reasons for a market to make a directional price move. Yet, even having good information may not be good enough.
It is often said the marketplace is the centralized voting place for price. What this implies is that all participants come together and vote through either buying or selling and, consequently, this creates price discovery and direction.
For agricultural commodities, such as corn, soybeans, and wheat, the central marketplace (exchange) becomes the price discovery mechanism. For these row crops, there are layers of analysis many use in their attempts to determine price direction. While not foolproof, one analysis is using the trend of projected carryout as an indicator of price direction.
Carryout is the summation of all supply and demand variables. Another way to think of carryout is the amount of grain or soybeans left over at the end of a marketing year. The amount of projected supply left over often determines a general price level. As an example, a few months back, the projected carryout for corn was near 2.8 billion bushels for the 2020/2021 season, a historically large figure. December corn futures were trading near $3.20. Subsequent USDA reports reduced carryout with the October figures now 2.167 billion bushels. Consequently, corn futures were trading near contract lows in August and now near $3.90.
The trend of projected carryout has declined two consecutive months and corn prices have recovered, trending higher during the same time period. In other words, the trend of price often has an inverse relationship with the trend of carryout.
We think there is merit and power in this analysis. That is, the carryout figure, a summation of anticipated leftover supply, has a strong impact on end user decisions to chase inventory or institute a just-in-time inventory management practice, where buying is only done as needed.
Veteran traders may use many types of methods to anticipate price direction. Some will use fundamental analysis (supply and demand) while others will use technical analysis (price charts).
One might argue that using a combination of ending stock directional analysis and chart signals is most appropriate when making decisions whether to buy (end users) or sell (producers).
A third analysis beyond fundamental and technical could be termed common-sense analysis. This simply implies that if prices are low and projected carryout is diminishing, there's a pretty good chance it is just a matter of time before technical signals kick in. Common sense suggests end users will recognize this environment and step up purchases, and sellers become reluctant.
Whatever analysis you utilize, use good risk management practices, which may include stops on futures or utilizing options with fixed risk.
If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-top-farm, extension 444.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.