The Three Pillars of Grain Trading

Uncertainty and volatility in the grain markets can be difficult to navigate, due in part to ever-changing fundamental and technical landscapes.

Using fundamental and technical analysis, along with seasonality, are the three pillars of grain trading. The first step toward honing your grain trading strategy is understanding the basic fundamentals that impact grain markets. From there, you can tie in technical analysis to help define potential entry and exit points and manage a position around your market bias and your risk appetite.

Lastly, you can view seasonal tendencies as the cherry on top. The alignment of all three pillars results in a high-conviction trade setup.

Grain Market Fundamentals: Yields, Acres, and Production

Corn and soybean yields get all the attention when it comes to discussing the grain markets, but to make those numbers mean anything, we also need to look at planted and harvested acres. Those numbers combine to give us the all-important production number, which is the supply side of the equation.

Inventories

Alongside production, we need to look at the stocks-to-usage ratio, which gives us an understanding of what global end users have at their disposal. If stocks are relatively high, then prices likely will be depressed, as there is no immediate demand for replacement.

Stocks-To-Usage Ratios

Once a broad-based picture of the supply situation is painted, analyzing how much of that production is currently being utilized, compared to how much of it is being stored for later usage, is paramount.

Global stocks-to-usage ratios have an inverse correlation between season-average- farm-prices (SAFP) received domestically. The chart at the top of p. 69 displays the previous 30 years of data relating to global stocks-to-usage ratios compared to SAFP for corn.

The job here is to delve into specifics – we need to define what ending stocks and usage means. Simply put, ending stocks for corn or soybeans is simply the difference between total supply (foreign and domestic) and usage (again, foreign and domestic). There are myriad components to usage, but the relationship between total supply and usage is paramount.

The Charts

Blue Line Futures is adamant in employing a “quanti-mental” approach to market analysis. Fundamental analysis provides an overarching direction of the trend, but technical analysis is imperative to determine the health within that fundamental trend. Knowing where you are within a trend is imperative for making entry and exit decisions or managing a position, no matter what contract you are trading.

Support and Resistance

Support is found in downward trends and represents a price, or range of prices, in which bulls historically re-enter the market.

By re-entering the market, bulls have the capacity to either halt or reverse the downtrend. Support can be found via trendlines, significant moving averages, and price history where clusters of prices are traded numerous times.

Resistance is effectively the opposite of support. It is found in upward trending markets, and it represents a price, or range of prices, in which bears historically re-enter the market. When a market hits resistance, it puts the uptrend in jeopardy because it can halt or stop a rally. In trading, when a market reaches a resistance pocket, traders may look to reduce

Pivot Pockets

In futures trading, pivot pockets are viewed as “no man’s land” or an inflection point for the market, meaning that the market has an equal likelihood of moving in either direction. Pivot pockets can be utilized as entry targets for breakouts (up or down). Put differently, a bullish trader may place an entry order just above the higher boundary of a pivot pocket, then have a profit target toward the middle or lower boundary of the nearest resistance pocket.

Seasonality

Seasonality is one of the most important concepts when it comes to grains and other physical commodities. The term “seasonality” refers to recurring patterns and trends that occur in prices over the duration of a year.

For example, grain markets typically trend lower in the fall as harvest progresses because there is more available supply coming to the market. Conversely, grain markets trend higher ahead of planting season as supply is lower, and the degree of uncertainty regarding the new crop year’s production is at its highest. A comprehensive database on seasonal tendencies can be an incredibly valuable to gain a greater understanding of seasonality.

The chart provides an example of a higher-conviction seasonal setup. The black line represents the current year, while the other lines represent prices averages for the last five, 10, 15, 20, and 30 years. Having this type of information at your fingertips or working with someone who does can be extremely helpful.

Matt Bresnahan is a market strategist for Blue Line Futures, Chicago, IL, (312) 858-7305.

Blue Line Futures is a dedicated futures brokerage that takes pride in assisting grain producers, intermediaries, and end-users in navigating futures markets, and mitigating their exposure to commodity price risk. Are you ready to take your trading to higher highs? Reach out to us at info@bluelinefutures.com or call into our trade desk at (312) 858-0500.