Todd's Take

October's Bright Spot

Todd Hultman
By  Todd Hultman , DTN Grains Analyst
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Breakouts in the U.S. Dollar Index and in December crude oil were two of the more interesting market moves in October. The October highlight for this analyst was seeing the Nobel Prize of Economic Sciences go to Professor Richard Thaler, an economist who understands markets are people. (Source: DTN ProphetX).

Unless some surprise happens on Tuesday, it looks like December corn and wheat will finish lower in the month of October while January soybeans sneak away with a modest gain. The more interesting market moves this month happened outside of grains as the stock market pushed to record highs, the U.S. dollar index broke out to a new three-month high, and December crude oil posted a new six-month high.

While there wasn't much for producers to cheer about in grain markets, October's announcement that the Nobel Prize of Economic Sciences would go to Professor Richard Thaler of the University of Chicago Booth School of Business was an encouraging sign of progress in my book. More economists seem to be catching on to the simple, yet profound notion that markets are people.

As the New York Times reported, the Nobel committee credited Professor Thaler for "moving economics toward a more realistic understanding of human behavior and for using the resulting insights to improve public policies ..." ("Nobel in Economics Is Awarded to Richard Thaler" by Binyamin Appelbaum, Oct. 9, 2017 at http://nyti.ms/…).

As an example of Thaler's work, one researcher estimated Thaler's insights into human behavior have led to a $29.6 billion increase in retirement savings ("Nobel Prize winner Richard Thaler may have added $29.6 billion to retirement accounts" by Alessandra Malito, Oct. 21, 2017 at http://on.mktw.net/…).

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When I first heard that Thaler received the award, I immediately thought of Daniel Kahneman, the 83-year old Princeton psychologist who won the same award in 2002. It was Kahneman's work with his longtime associate, Amos Tversky, both non-economists, that first challenged the dismal science's flawed assumption that market behavior was rational and paved the way for others like Thaler to expound on what that might mean.

According to the New Yorker, Kahneman was the first person Thaler called with news of October's prize as the two had been longtime friends and colleagues ("The Making Of Richard Thaler's Economics Nobel" by John Cassidy, Oct. 10, 2017 at http://bit.ly/…).

Another treat in October came when I discovered that Krista Tippett of Onbeing.org released an interview with Kahneman on Oct. 5. I heartily recommend Kahneman's book, "Thinking: Fast and Slow", but for those looking a shorter version, Tippett's interview is a good sample and can be heard or read at http://bit.ly/….

What do Thaler, Kahneman, and the growing influence of behavioral economists have to offer for trying to understand grain markets? I could list several things, but one useful example this year is Kahneman's finding of confirmation bias. Kahneman explains how we humans have a tendency to create stories quickly, arranging facts to defend pre-established beliefs.

If you ever had a political conversation with someone and wondered why presenting facts didn't change their mind, you have likely experienced confirmation bias. In the case of grains, we need to be careful that wanting prices to go a certain direction can distort how we interpret the facts and see the markets. Confirmation bias may have been at work this summer when many of us booed USDA for its August corn yield estimate of 169.5 bushels an acre.

Not all of the lessons of behavioral economics will be bearish for grains. In general, understanding the fallible side of human behavior as well as the rational side teaches us to be more humble about our assessments, to be slower in forming judgments, and to be more questioning of the market advice we are given. From my experience, those are all good things.

In U.S. grain markets, we have just witnessed a fifth consecutive year of successful harvests and, with corn and wheat prices especially depressed, the bearish story has become widely known and is easy to tell. That is the kind of market environment where we may later find that current prices are over-reacting to the bearish story that we are all hearing. It will be interesting to see how prices respond in early 2018.

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

Follow him on Twitter @ToddHultman1

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Todd Hultman