Todd's Take

Earlier this week, we turned our calendars to 2019 and sang Auld Lang Syne (of course you did, you just don't remember). Being a market nerd and pondering a new year of grain prices, I thought about a chart of spot corn prices that I have traditionally kept.

Going back to 1960, this chart shows annual changes in spot corn prices up through 2018, and the record is remarkably consistent. Spot corn was just shy of $1.14 a bushel at the start of 1960 and finished at $3.75 on the final day of 2018. In spite of the $2.61 gain, 59 years of spot corn prices have seen 31 years of higher closes and 28 years of lower closes -- nearly the same odds as a coin flip with a slight bullish edge. Hold that thought.

Ask anyone how to make money in markets and many will tell you, "Buy low, sell high." The funny thing is that in my 35 years of working around markets, I have seen very few that actually do that.

First of all, most of the traders I have come across have been short-term traders, holding positions for three months or less. In that narrow world, high and low don't have much meaning.

Second, many short-term traders need to limit their losses and typically use some form of trend-following method out of necessity. Trend-following is the opposite of "buy low, sell high."

Finally, the few that do try to buy low and sell high find it emotionally difficult. Almost by definition, when commodity prices are making their lows, the outlook is fundamentally bleak, accompanied by estimates of big surpluses and poor demand. Few have the stomach to go long in those kinds of situations.

Now, back to our corn chart, which at first glance, doesn't look much different than the odds on a roulette wheel. There is one simple change we can make to put the odds in our favor and it doesn't require cheating, counting cards or bribing the dealer.

If we simply notice where spot corn prices start the year in relation to their price range of the past five years, we can take advantage of a dramatic change in the odds. For example, there have been 11 years when prices started the calendar year in the top 25% of their five-year range, and in all but three of the years, prices finished lower.

What happened when prices started in the lower 25% of the five-year range, as they are again this year? Out of the 21 years when that happened, prices closed higher 12 times, and the average gains of the winning years were three times larger than the average losses of the losing years.

Do prices have to be in the lower 25% to have a bullish probability? Not necessarily. Out of 35 years when spot corn started in the lower half of its five-year range, prices finished the year higher 21 times and the average gain was more than twice the average loss.

I point all this out because the ramifications are profound and should make us think twice about how much faith we put into our fundamental outlooks -- especially this early in the new year when we know nothing about what the next 12 months will hold.

We also need to realize that past probabilities don't guarantee the marble will land on black in 2019. To stay grounded, keep in mind that 2014, 2015, 2016 and 2017 all started in the lowest quartile of the five-year range and they all ended in the red.

It is possible to flip tails four times in a row.

The real winner in this story is how the numbers affirm the concept of long-term value in the corn market, even when fundamental outlooks put us in a bearish mood. It is also why noticing where prices fall in relation to their five-year ranges is a part of DTN's Six Factors Market Strategies.

Should old acquaintance be forgot and never brought to mind?

I say no. As a simple history of corn prices shows, we have plenty to learn from the past.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman

(BE/BAS)

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