When 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.

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.

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 last year.

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 Report.

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 decisions consistently.

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 or buying.