The following editorial was published in Price Perceptions issue #1082 on September 21, 1996

Opportunity = Value - Price

In the spring of 1972, our fundamental work indicated that soybeans could trade as high as $7.00 sometime during the 1972-73 season. November ’72 futures were trading near $3.20 at the time and prices had not traded above $4.00 in modern history. Therefore, the forecast for an historic price advance was received with a great deal of skepticism by the trade. However, I held strong conviction in the analysis and accumulated a large long position, anticipating the making of my first fortune.

After six months of false starts, disappointing setbacks, and numerous small losses; I discovered that price did not necessarily respond to value. By late October, futures had advanced to only $3.60. I had bought rallies and sold breaks at least a half dozen times… I would need a rally to $7.00 just to break even on my buys and sells!

My losses were recouped and I actually made a few dollars by the time futures approached $7.00 the following February. I cashed in my small long position, happy to have survived the agonizing ordeal with the shirt still on my back. However, the move wasn’t over… Futures advanced to $13.00 in June before President Nixon placed an embargo on exports… and I was on the sidelines for the last $6.00 of the advance!

Because prices failed to trade high enough during the fall of 1972, demand was not curbed and an historic shortage occurred the following summer. Although I failed to capitalize on the historic move, I learned an invaluable lesson… Price and value are two separate and completely different things.

Last year, a similar situation developed in the corn market. In May ’95, we released a report entitled World Grain Drain. However, it did not contain a specific price forecast and presented only the case for a potential historic bull market. We wanted to avoid becoming “too bullish” during the early stages of a major advance. Sure enough, the corn market followed a path similar to ’72 soybeans. The market gyrated back and forth during summer and did not begin to respond adequately until fall. In September, we released our first price forecast for a move to $4.00. By early January, May corn futures had reached $3.78.

However, the historic bull market in corn would not unfold without a few hitches. We expected the stocks report, to be released January 11, to surprise the trade and mark beginning of another sharp advance. The report was even more bullish than we expected… But, May futures fell to $3.52 following the report. The marketplace once again demonstrated the difference between price and value.

Fortunately, the shake-out didn’t last long and we maintained the bulk of our positions. The rest of the story is history… corn reached new historic highs of $5.50 in early July.

Now, our research indicates potential for a major advance in soybeans. However, as demonstrated early this week, the marketplace is going to be reluctant to accept this possibility… A freeze in Iowa and Minnesota reduced production potential, but the market ignored implications for shortage and prices fell sharply early in the week.

We have the opportunity to capitalize on a developing bull market in soybeans. However, the opportunity is offered only because the marketplace has priced soybeans below fundamental value.

Trading for a major advance is an agonizing task. The marketplace must thoroughly test all avenues before it can proceed smoothly on an upward course. The ability to maintain long term confidence in a market dominated by short term events is the major determinant of eventual success.

Bill Gary
CIS, Inc.


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