If the best offence is a good defence, the reverse is also true.
Momentum is a wave that’s always better to ride when it’s working in your favour. Since the fall of 2020, it has paid major dividends to grow and hold. Crop inventory has been in very tight hands and for very good reason. The market trend and sentiment was that the agricultural commodity market would move higher, and higher it did.
With every move higher, supportive fundamentals pushed people to be more stubborn in their marketing, as early sellers faced serious hindsight regret. Then, along came the Russian invasion of Ukraine and the world has been thrown into being on the verge of a food crisis.
Up until recently, farmers have been on offence. They have been aggressive in not selling, they have been confident in the future market lift and not deterred from the scarcity bears.
But the last three weeks have changed this.
Just like in football, you cannot be on offence forever. The market is forcing farmers to once again think about defence.
What has been described as a commodity super cycle, farmers are struggling to understand their next move in the face of real volatility.
Is the rally over? What about Russia? Is there a new floor to this market? How big will a bounce be?
Over the past weeks, we have been interviewing commodity analysts every Wednesday on RealAg Radio, and you can really hear the mood changing. Two months ago it was all about “grow and hold.” Over the past month, it has shifted to protecting yourself and to start thinking defence.
In some ways this is more of a normal ebb and flow of the market; it’s the volatility that feels so unnerving.
In talking to analysts about this market, it’s critical to remember that playing defence does not mean you panic, grow impatient, or sit back. Just like that defensive lineman, you can dig in and be aggressive on defence. This crop is still relatively worth a lot of money and there is money to be made even in the face of increased inputs.
In talking to analysts over the past few weeks, being defensive is really about protecting yourself versus the downside. There are lots of tools to do this, like pricing the physical crop, buying put options or selling a futures contract.
In my opinion, thinking defensively is more about the mindset above anything else.
This market may bounce and may recover, but at the end of the day with relatively high historical prices you must protect your downside risk. Best of luck.