Marlin: sell the rumor and buy the fact

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Our basic understanding of the grain futures markets is the definition of futures. The prices quoted Feb. 25 on the Chicago Board of Trade are the market’s best guess of the price at a specific time in the future. Prices are based on present knowledge and how that influences future prices.

Rumor

Then comes the influence of rumor. Rumor is potential fact, often exaggerated. It is deadly to knowledge because the market must react to it, but no one knows how much to react — it is just a rumor.

The influence of rumor on the markets was demonstrated in two different, and opposite, ways Feb. 24.

First, we had the rumor of locusts in Asia. Overnight going into Feb. 24, the news hit that there were swarms of locust in China. Markets reacted to the news with a rumor — that there must be damage to wheat crops in India and China. On the rumor, Chicago wheat futures bounced up 25 cents. Then the news hit. There did not seem to be any damage. Prices went back down. The process demonstrated the axiom: “buy the rumor, sell the fact!”

Rumors are great for market longs. As one analyst I talked to Feb. 24 said, “If the rumor had lasted three days, I could have gotten some sales advice on!”

As I look back on my years in this business, the best rumor was the Chernobyl nuclear disaster. It was terrible for Ukraine and thousands of people there. It was great for American wheat farmers who watched the markets boom for three days, then mostly put in targets that were above the market and watched the market fall back as hard facts moderated the disaster. In that case, the net result was higher prices because there really were production issues. The prices just did not sustain the hysterical high of the early rumor.

Coronavirus

Now we have the manifestation of the coronavirus rumor. Grain prices crashed Feb. 24 with rumors of the virus getting worse. The grain markets had the company of virtually every other market. The Dow, for example, was off more than 1000 points.

Here the rumor is that the virus is expanding rapidly, and worldwide trade is being affected. The rumor has basis in fact. Italy had a jump in cases. South Korea is reporting a serious outbreak. Several nations have started quarantines. An American news story reports that our President was livid because some of the Americans quarantined on that cruise ship off Japan were allowed into our county in the custody of State Department officials with active cases of the virus. Some of the results of this are hurting trade.

Waiting on trade

We in the ag sector have been waiting impatiently for huge exports after the Jan. 15th signing of the so-called “Phase One” trade agreement with China. It has happened only very slowly, and now it has stopped. Unnoticed by most observers was that the agreement had a month to get started. In that month the coronavirus became a big issue.

Now, grain ships are in harbor off Japan, collecting demurrage because they can’t unload since truck drivers are locked up in their own homes, so they can’t haul grain. Grain markets suffered Feb. 24 from virus rumors and news, and from the simultaneous fact that this is the week we get to first notice day.

All of those farmers who did the right thing and sold grain on basis contracts now have to price those contracts before they go into delivery status after first notice day. That is, a futures contract on that day becomes a cash contract to deliver to a Board of Trade delivery point (no longer to Chicago) on the Illinois River. So, the contract must be offset by pricing before that date.

The result of the rumor of some potential worldwide disaster, helped by the mechanics of the futures market, was very negative. I remember looking at prices in the middle of the day Feb. 24, and corn was down seven cents, soybeans down 13.

Good news

There is good news. Overnight my nephew, a lawyer in Singapore, emailed me that he is no longer in quarantine. Singapore had 90 active cases, and 20,000 people with Chinese passports coming into the island nation every day. As of Feb. 24, the number of people being released from hospitals is now more than the new cases. He reports that the disease seems to spread easily, but is not that deadly with good care.

So, in the case of coronavirus, we may look back and say we should have “sold the rumor and bought the fact!”

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Marlin Clark is an associate of Russell Consulting Group, with a local office in Williamsfield, Ohio. Comments are welcome at 440-363-1803.

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