it comes to agricultural commodities there are some
realities and considerations that hedgers (farmers and
end users) and investors should focus on in making the
best financial decisions they can. Let’s break them
down into four groups.
do not believe in day trading or excessive trading.
Trading is for gamblers, not investors. Trading will
almost assuredly damage your long-term investment results.
If you are a hedger (farmer or end user) or investor,
you are making a decision to buy or sell with the idea
of getting the best return on your investment. If you
are a farmer your investment is the crop sitting in
the bin or the crop that is sitting out there in the
field or the live stock that still needs to be fed before
it comes to market. If you are an investor it is simply
the money backing the investment that is searching for
a good rate of return.
By the very fact that futures and options contain finite
months of ownership before expiration does necessitate
a more proactive approach (especially for options) when
compared to stocks for example. The key here is that
most farmers lose money in their hedging accounts every
year because advisors have convinced them that futures
and options are insurance products not investment products.
I emphatically disagree.
Farmers and investors have plenty of insurance and
the last thing they need is more of it. If you use futures
and options as insurance products then you are likely
to receive insurance type performance. In most years
you will lose the entire premium (investment) and every
once in a while you will get a large payoff (return).
I believe futures and options are investment products.
If one makes investment decisions on when to deploy
such products and when to cash them in, returns on the
farm and for investors should be greatly improved. So
the focus here is not to do a whole bunch of transactions
with options and futures that generate large commissions.
The focus here is to do a few sensible transactions
that generate a better outcome with a long term plan
in mind. I want to get compensated for my advice, not
for how many trades you do.
With futures, I believe in having a 1 to 2 year horizon
and establishing positional trades for those who want
to invest in the agricultural commodity markets by going
long or short. The key to successfully investing in
agricultural futures is to understand your risk tolerance
so that you can weather the volatility that will inevitably
ensue during the time of your investment. Failure to
correctly assess your appropriate risk tolerance is
a recipe for substandard investment performance.
is where most advisors spend a majority of their time.
In my opinion, it is of little benefit to the hedger
or investor in making a good financial decision. Don’
t get me wrong, one must have a fundamental framework
from which the foundation of a decision can be made.
But to spend too much time and to rely too much on fundamental
numbers is fraught with frustrating results. The reason
is simply this: the current fundamentals everybody knows,
so by definition the current fundamentals have little
or no advantage to the hedger or investor. Remember,
when a piece of information becomes known to all it
loses it value to the hedger or investor who has it.
What really matters is what the fundamentals ARE GOING
TO BE. The reality is that no one ever knows. In order
to get the future fundamentals right, one has to correctly
assess weather, acreage, exports, fund behavior, yield
prospects around the globe and global liquidity factors.
Although one may be able to get some of these issues
right some of the time, it is virtually impossible for
one to get all of them right all of the time. So time
would be better spent trying to know what you can ascertain
and spend less time trying to know the unknowable.
That is why we rely on a series of fundamental indicators
that have been time tested and highly correlated to
future price behavior. Some of the unique indicators
we use involve relative value, cash differentials and
futures spreads just to name of few.
Technical indicators have been around for a very long
time and advisors have been applying them to stocks,
bonds and commodities as an aid to help in the decision
making process for as long as there have been markets.
The problem is that there are very few proprietary technical
indicators anymore. The standard ones everyone knows
about already. So once again, by definition if everyone
is using a particular technical indicator then that
indicator becomes less and less effective over time.
Standard technical indicators such as Relative Strength
Index, Bollinger Bands, Stochastics, and the MACD Momentum
Indicator are but a few of the more popular ones out
there. They all do a very similar job.
All these technical indicators are very good a telling
you one thing. They are very good at telling you when
a market is running at full speed either in the up or
in the down direction. What they are woefully inadequate
at predicting is how long a market is going to run at
full speed. In the last year there have been extended
overbought and oversold readings from these indicators
in most agricultural commodity markets that have lasted
months at a time! In the Grain Markets it was not uncommon
to see the markets move up or down a dollar per bushel
or more between the beginning and the end of an overbought
or oversold condition. Those that made financial decisions
based solely on technical indicators got run over by
the market quite often. I could mention similar instances
in other Ag commodities (cotton, sugar etc.) over the
We prefer to rely on longer term logarithmic price channels
to give us better and much more correlated signals for
bottoms and tops in agricultural markets.
There must be more to making a good financial decision
than simply relying on technical indicators.
I know of very few advisors who focus at all on the
money flowing in and out of Agricultural markets as
a basis from which to help guide hedgers and investors
into making sound financial decisions. Many mention
it in a passing sentence but I have not seen many give
it the priority that I believe it deserves. What is
money flow anyway?
It is the net measure of the net buyers and net sellers
in any given market at any given moment in time. In
commodity markets we have three distinct constituencies:
Large Speculative Funds, Commercial hedgers and Index
Funds. The interaction of supply and demand between
these groups sets prices each and every day.
If there was a way to measure what these groups were
doing and to then translate that into a working tool
to adequately measure the forces of supply and demand,
you would have one very exciting tool at your disposal.
Fortunately for us, the CFTC (Commodity Futures Trading
Commission) tracks this every week and gives us the
raw numbers on Friday afternoon as to the Speculators,
Hedgers and Indexers positions as of the close of trading
the prior Tuesday. It is called the Commitment of Traders
I have developed an indicator that can help you decipher
this raw data into a simple and easily followed indicator
to help you make educated financial decisions on when
to buy and when to sell based upon your particular orientation.
I believe that a keen focus on money flow wrapped around
a firm appreciation for basic technical conditions and
a broad understanding of fundamentals gives the hedger
and investor the greatest ability to make the best financial
Following the forces of supply and demand is simple,
logical and effective. It simply makes good business
sense to understand and measure the Money Flow that
is affecting the markets into which you are selling
a free copy of our white paper which discusses
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I look forward to helping farmers (hedgers and end users)
and investors use this money flow tool to maximize desired
you would like to set up an account with us please call
us at 561-573-3766 or e-mail us at
You may also fill out an
online application directly with R.J. O'Brien.
President, Hackett Financial Advisors, Inc.