For active traders, dealing with a sudden or unexpected economic, political, or environmental event can be a monumental challenge. Unfortunately for many, an untimely circumstance is often the proverbial kiss of death to profitability.
Ag commodities frequently fall victim to various crises — whether they’re human-made or courtesy of Mother Nature. Among these markets, grain futures are regularly impacted. Let’s take a look at the underpinnings of global grain and how to address catastrophe.
Crisis and the Grain Futures Complex
For grain futures, crisis can come in many forms, from fire to flood. Here are three market fundamentals that dictate the evolving market dynamic facing corn, wheat, and soybeans:
- Weather: Perhaps the most basic ag market fundamental is the weather. Atmospheric conditions determine levels of precipitation as well as the length of the growing season. Weather’s impact on grain futures has been periodically extreme, with prime examples being the Midwestern drought of 2012 and the floods of 2019. In each case, grain prices (specifically corn) spiked as supplies dwindled following strong El Niño and La Niña cycles.
- Trade relations: Geopolitics are capable of sending the prices of ag commodities directional at the drop of a hat. The tit-for-tat exchange of tariffs between the U.S. and China in 2018 and this year is a prime example of how frayed trade relations can produce crisis-like conditions in grain futures. During the summer of 2018, soybeans exhibited significant weakness due escalating U.S.-China tariffs. In the lead up to the initial round of retaliatory Chinese tariffs on U.S. exports, soybeans fell to levels not seen in almost a decade.
- Economic cycle: The cyclical nature of the global economy often wields unpredictable results on the ag markets. Whether in the midst of a boom or bust, grain futures are frequently swept up by the action. For instance, the pricing of ag commodities surged in response to the Global Financial Crisis of 2008. The result was formation of a speculative bubble, as illustrated by an early-2008 400% rally in the price of Hard Red Spring wheat.
The important thing to realize about these three market drivers is that they directly influence the process of price discovery. Following the release of a sudden news item or passing of a key event, markets have a tendency to become hyperactive as traders limit exposure or assume fresh risk. On the other hand, sparse participation is common during extended periods of uncertainty. In either case, price action can become sporadic, inconsistent, and difficult to trade profitably.
Successfully Navigating a Crisis
No doubt about it, actively trading futures during times of crisis is an epic challenge. Market conditions can change rapidly, leaving unprepared traders in the dust. Simply put, if you’re going to engage the market during turbulent times, then your strategy must address the added risks involved.
A crisis futures trading strategy is well-advised to include the following parameters:
- Aggressive position management: Futures are leveraged securities, thus cutting losses quickly is an essential part of capital preservation. When the unexpected strikes, making a hasty exit is rarely a bad idea.
- Stop losses: Market uncertainty typically leads to chaotic order flow. Having stop loss orders resting at the exchange ensures that a negative position will be exited ASAP.
- Identification of depth of market: Understanding when markets are exceptionally thin or strong is an integral part of conducting efficient trade.
- Respect the news cycle: During uncertain times, keeping one eye on a live news feed is a worthwhile exercise. Breaking news can stimulate participation and turn already shaky markets upside down very quickly.
Futures are unique securities that can be exceedingly sensitive to any shift in the relative norm. In the event you fancy trading ag futures during challenging times, then cutting your losses quickly, avoiding thin markets, and staying abreast of the news are surefire ways to weather the storm.
Know Your Grain Market Fundamentals
The futures markets are diverse atmospheres, spanning commodities, debt, equities, and currencies. Accordingly, each contract offered for trade is subject to a unique group of market fundamentals. It doesn’t matter if you’re trading corn or the E-mini S&P 500, various circumstances will drive participation to the market. A crisis is just such a circumstance.
Since 1995, the pros at Daniels Trading have seen crises of all types come and go. For ideas on how to address turbulent markets successfully from your own unique perspective, contact the team at Daniels today.