Market Matters Blog

Everyone Needs a (Marketing) Code They Can Live By

DTN Senior Analyst Darin Newsom reminds me of the NCIS television show character Agent Leroy Jethro Gibbs every once in a while. They're both considered to be some of the best at what they do (analyzing markets and tracking down bad guys, respectively). They refuse to accept the easiest obtainable information as truth (USDA reports and plausible alibies, respectively). And they both keeps these weird lists of "rules" that can, and should, be broken in certain circumstances.

Agent Gibb's list of rules is much more extensive than Darin's, but then again his job is to solve heinous crimes and capture the world's worst criminals. Darin's mission is, perhaps, a little narrower and a whole lot nicer: to help farmers understand the markets and make better marketing decisions.

To use Gibb's words: Everyone needs a code they can live by. Darin has a similar philosophy, although I've never heard him articulate his rules all together, at once, until this morning at DTN University's Master Marketing course in Chicago. If I could only tell you how many times I've heard about Rule No. 1 or Rule No. 2. In all honesty, I've never been able to keep them straight, so I'm going to make you (and me) a little cheat sheet.

1) Don't get crosswise in the trend.

Some people would also describe this one as "the trend is your friend." But if you've read Darin often enough, this is where he often refers to Isaac Newton's First Law of Motion in its application to markets: a trending market will stay in that trend until acted upon by an outside force. That outside force can be a lot of things, like a change in fundamentals or simply a strong change in speculative traders' viewpoint.

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Now, when it comes to looking at trends, Newsom's pretty strict. There are short term charts (daily), mid-term charts (weekly) and long term charts (monthly). Daily charts can gyrate heavily on news that doesn't fundamentally change the markets direction and often show technical signals that don't materialize. On the other hand, monthly charts can take too much time to reflect a major change. So Newsom likes to look at charts of weekly prices to gauge the trend of the market.

2) Let the market dictate your actions.

While this rule is very simple in concept, Newsom's interpretation is structural, taking all of the emotion or attempts to outguess USDA reports out of the equation. Farmers need to know how the basis, futures spreads, and futures contracts are trending. Futures spreads reveal the position of commercial grain traders. A strong carry situation is considered a bearish outlook, while a tighter carry is less bearish to neutral and an inverse is bullish.

The position of noncommercial, or speculative, traders is often revealed in the futures market and in the weekly CFTC Commitment of Traders report.

Newsom created a matrix of market types based on whether commercial and noncommercial traders are bullish, bearish or neutral. He then matched them up with the best marketing strategy for that market type. Here's a link to the presentation he gave today, and the chart is near the end, page 30: http://bit.ly/…

3) Manage margin risk.

"I've seen margin calls be the death of the best marketing plans I've seen in place," Newsom said. "By understanding the different types of markets, and that each has a different read, we can manage our margin risk by running it through different filters." Farmers need to think about price distribution, seasonality and market volatility when deciding what kind of strategy they apply.

Like I mentioned earlier, Newsom's rules are not absolutes. Sometimes there are contra seasonal moves or excessive volatility that make a certain strategy impractical. And some of the market types are rare and tend to be very short-lived, like No. 7 when commercial traders are bullish and speculative traders are bearish. In that kind of scenario, it won't be long before one side changes its opinion. Most often, speculative traders will come around to commercials' point of view, but not always, Newsom said.

Darin, like Agent Gibbs, stands firmly behind his rules, and only calls them "guidelines" when its absolutely necessary to break them. Gibb's rules are much broader, and he often refers to them as a code. I'm thankful Darin's are more specific.

(For anyone who would like to look over Agent Gibb's Rules, here's a good link: http://bit.ly/…)

(CZ/SK)

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