TFM Perspective 5-21-2021



The recent drop in corn prices seemed to occur at lightning speed, as July futures on Thursday locked limit lower (40 cents) and then finished another 31 cents weaker on Friday. From the peak on May 7 at $7.35-1/4 to the low on May 14 at 6.33, the total range was $1.02-1/4, or a decline of 13.9% from the high to low. December futures experienced a similar fate, peaking at $6.38 on May 7 and reaching a low of $5.20-3/4 on May 19. The range was $1.17-1/4, or loss of 18.4%, from high to low. The speed at which prices dropped is astounding. One week, prices are reaching into new highs, screeching upward; the next week, plummeting. To say it gives traders consternation may be an understatement. What about farmers and end users? The tensions and emotions are a roller coaster ride many would like to avoid. It is the reality of tight supplies, strong demand, and money flow. The higher prices go, the more likely the turn lower will initially be violent.

Why do prices crash so hard? Often it is combination of multiple elements. However, the primary reason is liquidation, establishment of new sell positions, or both. In the futures market, stop orders can be used to enter or exit a market. As an example, if you bought December corn futures at $5 and futures rally to $6, you have an interest in keeping your gains. What happens if prices turn lower? You either must be in the right spot at the right time and make a decision to exit, or you can follow the market with a trigger order. These trigger orders are called stops. One method to enter or exit the market is by using a trailing stop. Sell stop orders, once triggered, become market orders, which means you are a seller at the best price possible immediately. In our example, let’s say corn prices are at $6 and you believe if they trade to $5.90, then price weakness is developing. You are willing to exit if that occurs. If the $5.90 stop order is triggered, you are a seller. The point is that you may be a seller on a day when your opinion could still be friendly the market. Additionally, once placed, your order is there and working for you. You are not required to watch the market and make a spot decision.

When prices rally sharply, traders who have bought futures often want to protect their gains. Using trailing stops makes a lot of sense. It allows you to have a bullish mindset and to stay long the market until prices turn. Farmers can use stop orders for the same rationale. This spring you are busy planting, and the market is moving higher. All is well as corn prices continue to rally and increase the value of your unpriced crop. Yet, this past week was brutal if you did not make sales. Doing nothing was good, then not good. Using a trailing stop to sell may have triggered an action versus waiting to see if prices might rebound, which did not happen.

In the world of trading, open interest is the number of contracts that are trading. As volatility increases, open interest is often increasing. This should be a signal that, at any one time, there could be a significant number of market participants that exit positions. If many exit at one time, this can put price pressure in place and, consequently, the market begins to fall. Larger traders may be defined by a group called managed money, depending on the number of contracts. Managed money has been aggressively net long the corn market for many months. Money managers will often place stops under the market so that, if prices begin to fall, they begin to reduce positions. We believe this is essentially what has happened in the corn market over the last week. You might find a reason or reasons why prices dropped, yet often it is a combination of some type of change in the news or technical selling (using charts to set stops) that have big impacts on price direction. Regardless, as a producer of corn, you want to be aware that using stop orders may be a significant advantage to managing volatility. The idea of selling at the high is enticing and elusive. The idea of selling at a higher range may be more probable using stop orders. The speed at which the market can drop, as evidenced this last week, is frightening and real. Having an advantage with stop orders may be paramount to helping you manage risk and take advantage of opportunity.

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.


Bryan Doherty

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