Have you ever wondered why it is so hard to figure out the commodity markets?
Why is it that so many of us fail to market and trade well, leaving large sums of money on the table due to poor marketing or allowing the board to get our money when trying to invest?
Much of the stress and failures can be tied to our own psychology. Everything we have been taught, every rational or logical thought is thrown by the wayside in the commodity markets.
Where in the real world, a red light means stop; a red light means go in the commodity markets. How many times have you heard of a market receiving bullish fundamental data from a monthly USDA report only to end sharply lower after receiving the news?
It is hard to understand the psychology of the markets, but even harder to understand our own emotional and rational thinking.
A number of years ago, a reporter asked a well-known commodity trader about his odds of making money in the commodity markets. The trader replied with a straight face, “the odds are 50-50 you will lose 90 percent of the time.”
Generally speaking, it is well believed that more than 80 percent of the participants in the marketplace will lose money each year. It is the minority, the 20 percnet, who make money.
To examine how your mind works in a trading situation, let’s take a simple test. I will give you a few trade scenarios for you to consider:
- A: Two possible out-comes of the first trade: 1. A sure win of $3,000 or 2. an 80 percent chance of winning $4,000 with a 20 percnet chance of making nothing. Which will you take?
- B: A choice between: 1. A sure loss of $3,000 or 2. an 80 percent chance of losing $4,000 and a 20 percent chance of losing nothing. Which outcome you will choose?
If you are like most people, in trade scenario A you opted for the sure $3,000 gain. In terms of math, though, the second choice was better ($4,000 x 80% = $3,200).
In trade scenario B, about 90 percent of people select the second choice, losing an additional $1,000 to gain a 20 percent chance of losing nothing.
What this all proves after two professors at the University of Chicago conducted this survey and many other similar tests and have come away with a fascinating discovery for commodity traders. The bottom line of about 10 years of research and testing more than 100,000 minds is:
“The typical person avoids risk when seeking gains and the typical person embraces risk to avoid losses. It gets down to this; the way we are made is such that the fear of loss is more powerful than the hope of gain.
So guess what happens when it comes to trading? The fear of loss forces you to take additional risk – risk removing your stop or simply trading without one.
The other side of the coin is that we avoid risk when seeking gains. Hence, once you’ve got a profit, you will exit too soon to avoid further risk of getting greater gain.
Now that you know how you act and re-act, you need to purge and cleanse that old noggin to a winners’ way of thinking. Let profits run and cut losses short.
Corn closed the week $.04 1/2 higher. Last week, private exporters sold 300,000 metric tons of U.S. corn to an unknown destination and 360,000 mt of U.S. corn to China for the 2013/14 marketing year.
In the weekly export sales report, old corn sales were only 4.1 million bushels, below the 8.2 mb needed each week to reach the lowered USDA export forecast of 750 mb.
Last week, The USDA rated corn planting at 71 percnet done nationwide, tying the one week record for largest percentage planted in a single week.
Emergence is at 19 percent versus 73 percent last year and 46 percent on average.
Plantings in Texas is 84 percent complete and Missouri is 70 percent complete, with key growing states of Iowa at 71 percent, Indiana 64 percnet, Illinois 74 percent and Nebraska at 84 percent complete.
Corn is finding mild support from wet weather forecasts that are limiting the last of the corn seedings. December corn will find good technical support from last year’s lows that occurred near $5.12 to $5.15 per bushels. This support area should limit the downside until the crop has been planted and more is known about the growing season.
Obviously, the USDA is projecting huge ending stocks which should pressure prices until the next growing season if the projected crop is realized.
Strategy and outlook: Producers are now 100 percent of 2012/13 crop and are also 40 percent sold of the 2013/14 crop. Sell 10 percent of the 2013/14 crop at $5.80 March.
They re-owned 50 percent of the 2012/13 corn crop with July calls. They bought December corn puts on 50 percent of 2013 production when December traded to $5.67.
Soybeans closed the week $.27 3/4 higher from last week. Last week, private exporters reported sales of 115,000 mt of U.S. soybeans sold to China for the 2013/14 marketing year.
In the weekly export sales report, old crop soybean sales were decent at 6.7 mb, above the 3.8 mb needed each week to reach the USDA forecast of 1.35 billion bushels.
Over the last four weeks, old crop sales are still net negative.
New sales were strong at 12.7 mb, but annual commitments are now 326 mb this year compared to last year’s 381 mb commitment pace.
Soybean plantings are at 24 percent complete versus 71 percent last year and 42 percent on average.
Iowa is 16 percent planted with Nebraska at 33 percent, Minnesota at 23 percent, Illinois at 19 percent and Indiana at 30 percent planted.
Old crop soybeans have soared higher on tight stocks and record narrow basis levels. However, farmer selling will increase as the price and basis improves and there is talk of South American soybeans being imported into the U.S.
There is talk of soybean acres being switched from corn, which would add to the bearish new crop profile if a large U.S. soybean crop is raised.
Strategy and outlook: Producers are 100 percent sold of the 2012/13 production and are 40 percent sold of 2013/14 crop.
They re-owned 50 percent of 2012/13 production with July soybean calls.
They should cover 50 percent of 2013 production with November puts when November trades to $12.48.
Brian Hoops is president and senior market analyst of Midwest Market Solutions Inc. Midwest Market Solutions is a full-service commodity brokerage and marketing advisory service, clearing through R.J.