Todd's Take

The Uncertainty Ahead

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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The markets look rather foggy and uncertain, but we shouldn't be frightened about the future. (DTN photo by Pam Smith)

By the time this column is posted Tuesday, the polls will be opening across the country to decide whether America will choose its first woman or 44th man to be the 45th president of the United States.*

It is hard to imagine two more different choices and, as far as markets are concerned, the possibility of a Trump victory brings with it a wider-than-usual range of unknown consequences for grain markets.

I'm not going rehash the politics of this year's choices, but to understand markets, it's important to at least be aware of the sources of risk that lurk in the shadows of the unknown -- especially at times like these when politicians and commentators try so hard to appear confident of the things they know.

One example of suspect confidence will come after Wednesday's World Agricultural Supply and Demand Estimates (WASDE) report. If Dow Jones' pre-report survey is close, many will try to tell us that U.S. ending corn stocks will total 2.3 billion bushels in 2016-17 and ending soybean stocks will come in around 420 million bushels.

However, the key letter in WASDE is E for "estimates." If we think it through a little more, Wednesday's record-high crop numbers are admittedly bearish but will never be anything more than rough approximations. The demand estimates are especially difficult to predict 10 months out from the end of the season. In the case of soybeans, we really don't know if ending stocks will finish higher or lower than the 197 mb estimated for 2015-16.

In the shorthand way that we often talk about these things -- and I have also been guilty -- we find it easier to talk about USDA's numbers as if they were accurate, because it's tiring to keep referencing margins of error and the perennial problems that come with trusting various sources of data, especially from closed societies like China. The unfortunate result is that we can be lulled into a false sense of confidence about what we think we know.

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If USDA estimates were the only source of uncertainty for grain markets, we could get by, but they're just the beginning. Weather, of course, is the king of unexpected influence on grain prices. The extended forecast now looks warm and mostly dry in the U.S., favorable for the remaining row-crop harvest. In Brazil, the planting season is off to a good start with no sign of La Nina-related problems, but there is plenty of growing season still ahead.

Politics, conflict and outbreaks of disease are other sources of risk that have produced their own surprises at times. A Hillary Clinton presidency is not likely to bring drastic changes to U.S. ag policy, but soybean prices have shown nervousness about the possibility of President Donald Trump following through on promises to get tough with trading partners like China and Mexico.

Finally, as Defense Secretary Donald Rumsfeld pointed out during the Iraq war, there are also "unknown unknowns." Disrupting events, which aren't even on the radar yet. As I see it, unknown unknowns are a good argument for owning put options.

The point of all of this is not to be frightened about the future, but to remain aware that uncertainty is not a once-in-four-years event. It can come in many forms and always has been a bigger part of the grain markets than many of us would like to admit.

The way to deal with market uncertainty is not to stick our head in the sand and pretend to know things we actually don't, but to pay attention to the market's own clues.

Here in early November, the trends for corn and soybeans are both technically higher, but neither price is going anywhere fast. Even though exports are off to a good start in the new season, futures spreads indicate neutral commercial outlooks, at best. So far, we look to be in for a quiet winter.

Tuesday's election may bring a surprise to the markets, but if it does, it won't be the first or the last. If you would like help navigating the market's uncertainties, consider a free 14-day trial to DTN's Six Factors Market Strategies at http://bit.ly/… .

* President Obama is considered the 44th President of the United States because Grover Cleveland was counted twice. Obama is actually the 43rd man to serve in the office.

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Editor's note: DTN's Todd Hultman and Darin Newsom will be doing live coverage of global market reaction to the election. Follow them doing updates in the comments section of the Market Matters blog from 5 p.m. CST through the next morning.

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

Follow Todd Hultman on Twitter @ToddHultman1

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Todd Hultman