It’s been a little over a year since I joined the good people at Lakefront as a broker to work with farmers who are trying to manage their product price risk. Since then we’ve been focusing on trying to forecast trends where we may like to try and market their product for the highest profit. As we all know or have been taught, price prediction is impossible. Over the past several weeks we’ve seen how hard it can be to truly predict the extent of a rally by watching soybeans chasing soymeal as crush margins sky rocket. Many fundamental and technical analysts, brokers, and traders such as myself continue to try to forecast the potential for a move despite knowing that we’ll never really know for sure until it’s already over. Does that mean we shouldn’t even try? No, but it does mean we need to adjust our expectations for what we are trying to achieve, which is manage risk to an acceptable level.
The method that I’ve been using centers around three main points. First, what is the cost of production? By knowing cost of production, we can begin to figure a breakeven across various potential yields throughout the marketing year. Once this is known we can begin to discuss reasonable, yet defined, profitability goals or price targets where there is contentment. Without knowing the cost of production how can you figure a price where there is contentment? You can’t and you set yourself up for failure with nothing but frustration. The third and final point is trading what you know to the best of your ability with the information you have knowing that the information is never perfect. Trust that you did the best you could with what you knew and revisit your position weekly to make sure that it still makes sense and more frequently during times when special circumstances dictate; weather markets for example. This all seems pretty obvious, but can sometimes be hard to remember as we’ve all been caught up in a move before and lost perspective. Have a great rest of your day and if you have any questions, comments, or would like to chat markets please give me a call or email at Garret@lakefrontfutures.com