On a cold winter night, few things are better than a warm drink and a good book. One of my favorite contemporary authors is Malcolm Gladwell, and his latest book, “What the Dog Saw,” is an interesting collection of essays on a wide range of topics. In one essay, he offers a thought-provoking discussion about the value of information and the distinction between puzzles and mysteries.
Puzzles and mysteries; most of us treat these terms as synonymous but there is a difference. Puzzles have a solution, which can be discovered with more information. Mysteries, on the other hand, have no solution. They “require judgments and the assessment of uncertainty, and the hard part is not that we have too little information but that we have too much.”
Whoa — these are deep thoughts. However, I immediately recognized an analogy in the grain markets. Many of us treat the markets as a puzzle, constantly searching for more and better information in order to solve the problem of price direction. What if grain markets are not puzzles, but mysteries?
THE ANSWER TO this question will have serious implications on where you should devote your time in marketing grain. If markets are a puzzle, then all of your energies should be directed toward collecting more information, knowing that eventually you will solve the puzzle. If markets are a mystery, then more information will only deepen the mystery. Grain markets are a mystery.
How do you deal with the difficult task of marketing grain when surrounded by a mystery? Start with the things you know. Concerning old-crop grain, carrying charges and basis speak to the value of storage. Based on a large carry in the corn market and a strong (early) basis in soybeans, I recommended selling the carry with corn in storage and selling soybeans at harvest. Concerning next year's crop, production costs are an excellent place to start establishing your price objectives in 2010.
Ed Usset is a grain marketing specialist for the University of Minnesota Center for Farm Financial Management (CFFM). He can be reached at email@example.com.
How can we explain price movements in the past year, and can the explanation help us in 2010?
After a massive price meltdown in the last half of 2008, corn and soybean prices slipped into a broad trading range in 2009. Prices trended higher through much of the first six months of the year, followed by a textbook example of a seasonal move lower during a favorable growing season. We ended the year favorably, with prices toward the upper end of the range.
Any explanation of price should address the “fundamentals” of supply and demand. We must consider planted acres and growing conditions, export demand and the value of the dollar, ethanol and livestock margins, etc. There certainly is a lot of information available on all of these factors.
Examine the chart and you might find a different explanation. Except for a 10-week period during the growing season, the direction of the stock market and the direction of soybean prices moved in tandem.
The stock market serves as a proxy vote on our economic health. Tell me which way the economy is going in the year ahead and you have my prediction on grain prices. The challenge, of course, is that the direction of our economy is a mystery.