Cargill Risk Management
You have the need for risk management solutions – we have a variety of solutions to meet your needs. It’s a win-win situation!
We work with customers in a variety of ways – taking into account your individual needs and risk management goals. Here are a few examples:
This is by no means an exhaustive list, so contact Cargill Risk Management to discuss how you can start a risk management program to support your business goals.
By: Rob Wolter
Over the last number of years, many executives and managers in the food space have done well by essentially employing a “do nothing” approach when it comes to hedging their price risk in food commodities. They’ve done this by simply keeping an eye on heavy supply forecasts and waiting for deferred prices to drop as consumption months approach.
“Doing nothing” to establish your forward prices is doing something in the sense that you are willing to accept where the market is at when your consumption month approaches. Doing nothing works when you expect prices to grind lower. The consequential question today is: Can this price pattern continue to be counted on or is price activity changing & increased volatility around the corner?
“Doing nothing” or implementing the same approach that’s served you well the past five years, is worth taking a hard look at now.
Why?
Two big reasons: Weather and trading volatility.
Back in January, no one was forecasting the drought Argentina experienced. Then, Brazil’s Safrina corn crop experienced its own drought. The net result has been unanticipated drops in forecast production for corn and soybeans in South America. And, the larger net result has been strong trade out of other major corn- and soybean-producing countries like the United States.
At the tail end of the growing season in the Southern Hemisphere, the attention now turns to growing conditions in North America. Recent forecasts are calling for the lowest acreage for U.S. corn planted acreage in more than a decade.
The need to achieve an average to above-average corn yield has escalated. Without a normal growing season, the U.S. has the potential to maintain the trajectory towards tighter global corn supplies. If corn tightens, more acres will be required for corn to reload supplies. These corn acres will be in competition with acres going to wheat, soybeans, and other crops.
Bottom line: Weather has always mattered in the food commodity business. We all know the potential impacts droughts, floods and other weather events can have on crops. But, this year weather might just matter a little more.
So, how can you start rethinking your food commodity hedging approach—especially leaving the biggest food event of the year in Kansas City?
For starters, consider shifting your mindset—from “doing nothing” to being more active. Now, that’s not easy. In fact, we wrote about the emotions of dealing with “bad trades”. The emotional component can keep a lot of people from making these kinds of tough decisions. But keep in mind, “doing nothing” is still a decision. And, it’s still a risk.
I’d also encourage you to consider that you can have price protection AND the opportunity for improvement in your margins and profits. People do it every day. Should your approach to managing risk in a potentially higher volatility environment be different than a low volatility one? No one wants to lock in prices at levels that would negate the chance for year-over-year savings. That said, you don’t want to have costs get any worse than they are already forecasted to be either. It’s a real dilemma, with real dollars and cents on the line.
On top of it all, can you really count on passing on all the increases to your end customers? The case for upside protection with the opportunity for downside participation is strong today. It’s time to dust off those old strategies and challenge the strategies employed for the past five years.
Likely, you have already heard about technical analysis. If you haven’t started using it yet, it could be because you are asking yourself, “How does it work in practice, and can I rely on it as a practical tool?” People ask me this all the time.
Starting to use technical analysis in your risk management programs may seem daunting, but the reality is that so many market participants use some of the core indicators in technical analysis today that studying them can help you understand the mood of the market. If you know which technical tools and indicators others are using to guide their decisions, it gives you a window into their thinking, like a chess match where you know the strategies your opponent regularly employs.
The first thing people should understand about technical analysis is that it doesn’t rely on one magical indicator. Looking at several indicators together can give you a more three-dimensional view of market sentiment. Doing so helps prevent blind spots or biases.
Looking briefly at a few indicators can help us grasp how they build a richer view of the market.
Three basic types of technical tools and indicators
1. Candlesticks
Among the oldest and most widely used technical tools, candlesticks first emerged in the rice market of Japan at some point in the last 200 years. They capture the open, close, high and low prices for a given period of time, as well as the overall intensity and direction of trading.
Closely analyzing candlesticks can help identify important price levels of support and resistance in the market. These levels reveal where many participants have set automated orders, and they essentially constitute the fair price of the moment. This gives you crucial information about what others are doing, thinking or perceiving, and which direction prices may go when they finally break through that level of support or resistance. It can help you cut through the noise of daily volatility.
Movements on candlestick charts can reveal key pricing levels like this one for soybean meal in 2017.
2. Moving averages
A weighted look at what prices have been doing during various intervals of the recent past can also give a good glimpse into market sentiment. The most basic form of this type of analysis is looking at simple moving averages compared to a price chart – 50- and 200-day moving averages are common intervals. When the market price crosses the 50-day moving average, this is a strong sign that a bullish or bearish trend is emerging.
Simple moving averages can confirm a new trend. For example, the 50-day average crosses the 200-day average right before a longer period of lower prices.
Exponential moving averages can be even more precise indicators. When comparing the exponential moving average of intervals such as nine, 12 and 26 days, you can see how directional momentum is building, because the more recent days are weighted more heavily. These averages can be compared in different ways using oscillator tools.
3. Fibonacci retracements
This indicator is shrouded in a bit of mystique. Fibonacci retracements are based on the golden ratio and the sequence of numbers studied by an Italian mathematician of the same name from the 13th century. Fibonacci sequences are found everywhere in nature, and at some point, traders noticed that price movements and ensuing retracements can correlate to them as well.
Large price movements and the corresponding retracements toward previous levels frequently can correlate to percentages identified by Fibonacci sequences.
With so many participants watching Fibonacci sequences, the question becomes whether this type of pattern is some secret tendency of the market, or whether prices follow these ratios because everyone expects them to, making them a self-fulfilling prophecy. Regardless of which is true, the result is that they can often identify strong levels of near-term support and resistance in the market.
This article is the first in a series of two that can help you understand how technical analysis can help you decipher the sentiment of the market. Read Part Two to learn more about how these three indicators work together and how you can use them to provide you with more information that can help your business.
We started the conversation about the three indicators you can use to start you down the technical analysis path in Three Indicators to Start You Down the Technical Analysis Path- Part One. If you haven’t read it, I recommend starting there. The following information builds on that article by tying it all together.
Here’s a quick reminder of the three basic types of technical tools and indicators:
How the indicators work together
The following series of charts layers the technical analysis indicators together to give a more complete picture.
Source: Reuters
Setting up your graph with a candlestick pattern will help you identify trading patterns. Before adding more technical tools, take a second to identify obvious trends.
Source: Reuters
This chart shows short-term trends up and short-term trends down, but by drawing support and resistance lines, you can identify a long-term range pattern.
Souce: Reuters
Simple moving averages of 50, 100 and 200 days remove the noise from strong market moves and allow you to identify levels where the market has traded the most for a specific period.
Source: Reuters
A Fibonacci retracement will confirm the technical levels identified by other technical tools and will give us additional support and resistance levels that other market participants are using as well.
How did we do?
The main goal of a technical analysis is to complement your market analysis based on fundamental factors. In this historical case:
This technical and statistical information will add value to your market analysis and will be most important when fundamental factors are affecting market prices but their full impact is yet to be confirmed.
One common example of this is when there is damage to a crop that will affect its supply and make its price move. Until there is a clear understanding of the damage and its impact, the market will trade within technical levels because that is the information readily available. As more fundamental information arrives, the market price will adjust accordingly and may still follow some of those support and resistance levels set in your original technical analysis.
Take the leap
Technical analysis can provide a powerful context to price movements and help you decipher the sentiment of the market, and the three described above are just the beginning.
Technical analysis should be paired with caution, of course. Its conclusions may differ from the conclusions reached purely from the fundamentals. It presupposes that market prices have already absorbed all the fundamental information and biases that are available. Finally, it assumes some basic philosophies such as that history repeats itself, that the market moves in trends and that the market is essentially irrational.
Keeping these caveats in mind, there is real value in using technical analysis. In particular, it provides a rich view of what other market participants are likely thinking. In fact, because so many participants use its principles, this may be its most powerful aspect – simply understanding what many other people are likely to assume about the market’s trends. Without this information, you may have blinders on as you make your own decisions about how prices will move in the near future.
For this reason, if you have been hesitant to start using technical analysis, you may be at a disadvantage. It could be time to let go of your reluctance and take the leap.
