In Search of Great Expectations


In everyday conversations, producers are often frustrated by the market’s reaction to new information, like the USDA supply and demand reports or changes in weather expectations. Why, on seemingly price-friendly news, do we sometimes see a ho-hum market reaction or even a decline in price? Or, on the other hand, a rally on news that seems detrimental to better prices? It all has to do with the collision of market expectations vs. reality.


USDA Supply/Demand Reports as an Example of Expectations vs. Reality


Let’s examine this market phenomenon using the USDA supply/demand reports. As marketers, often long before the USDA releases those reports, you need to make decisions on pricing your grain. Because you don’t know yet exactly how big any crop will be, you are forced to act on educated guesses as to whether the market is fairly valued, over-valued, or under-valued. Will the crop year be a bust or boom for U.S. agriculture? Will weather events have long-term impact on yield? How might non-U.S. production impact the global price for your crop? Bear in mind that it’s not just you making pricing decisions. Purchasers of your commodity are also making decisions based on forecasts and snippets of information, side by side with managed money players making both long and short bets on the market. Your perspective on the market drives your personal pricing decisions, which may include doing nothing at all.


By the time the USDA supply/demand reports come out, pricing strategies among all market participants have long been set in motion via trades in the market. In other words, market expectations of supply and demand have already been built into the market price. The release of the USDA reports, in contrast, represents the official snapshot of reality in real time. Whether you love or hate the USDA, their reports serve as the “real” state of supply and demand, and signal to market participants whether their bets on market direction were accurate, or if their strategies need to be adjusted. If expectations and reality are close to each other, the market remains fairly steady, as strategies align with the current, measured state of supply and demand. However, if there are surprises upon the release of the report, the market is going to react, as participants in the market adjust their bets with a more fact-based set of data.


Why Prices Might Go in a Direction You Don’t Expect


Let’s think about how this might play out. Say the July supply/demand report confirms the market sentiment of low yield for the current crop. Great—you should expect a lower stocks-to-use and a rally, right? Hold on a minute. In our scenario, the projected yield—while low—is higher than expectations. As such, the estimated supply is greater (i.e., higher stocks-to-use) than had been previously anticipated and built into the market price. Participants in the market will likely, on balance, go shorter and trade lower as they pull back on long strategies that had been based on lower yield and ending stock expectations—possibly for an extended time. In other words, prices will likely decrease as the market corrects the pre-release sentiment.


Recognize that the time around the release of the USDA reports may offer insight and opportunity as the market reacts to the reports. For instance, in the example above, farmers may have an opportunity to take advantage of still decent prices before they fall too much.


An important side note: like sentiment prior to the release of USDA reports, weather forecasts are also baked into anticipated ending stocks (based on production and anticipated demand) and market price. When forecasts break with actual weather events, expect an impact on the market.


Ukraine: An Extreme Example of Expectations vs. Reality


It’s not just new data or weather changes that can swing prices with existing imbedded expectations. Sadly, disruptions to supply from situations like wars have a big impact on the market. Take Ukraine, for example. Prior to the Russian invasion, the global market had already absorbed the expected production from Ukraine. Post invasion, it was unknown whether any supply from Ukraine would be available. At a minimum, the market needed to do two things:

  1. Meet existing sales commitments either by buying back sales that were to be supplied with Ukrainian grain and/or securing grain from another region (such as the U.S.) as a replacement.
  2. Price in a premium to account for less supply from the region until proven otherwise.


Just to hammer the point, grain merchants left with uncovered sales commitments (and looming unquantifiable risk) needed to buy back their positions in the face of dramatically decreased global stock and increasing price. For instance, many elevators short on paper and long on physical cash grain may have been subject to margin requirements they couldn’t make. Others may have had hedged Ukraine purchases without sales on the books, which left them naked short on paper. Still others may have made physical cash grain sales, based on procured Ukrainian grain, leaving them naked short physical grain. All in all, the only viable choice for all these short speculators was to buy back hedges. Painfully, they were squeezed by speculators or merchants with unhedged long positions, who slowly (relatively speaking) let the shorts out of their positions—after being well-compensated, of course.


Considerations as You Set Your Strategy in the Face of Uncertainty


  1. Remember that the market’s sentiment is a collective of individual participants’ long or short positions at any time. With that in mind, set your strategy based on your sentiment vs. blindly following market sentiment.
  2. Separate your sentiment for the futures vs. basis portion of your cash contracts. While you have a great perspective on the conditions impacting basis, the futures portion of the price you receive from a cash grain contract is set globally. Grain contracts traded on the Chicago Board of Trade carry worldwide influence and are traded by participants worldwide. In other words, the conditions locally do not necessarily correlate to the futures price.
  3. As big, planned events occur (like the release of the USDA reports), be available to your advisor so that you can react nimbly to whatever the market brings.
  4. Nobody really knows where the market will go, so consider strategies that position you for whatever happens to price as expectations meet reality.


We’re here to help.


Do you have questions about expectations, market reactions, or our recommendations? We’re here to help. Give Total Farm Marketing a call at 800.334.9779.


Scott Masters

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