The following editorial was published in Price Perceptions issue #1234 on January 25, 2003

Market Mistakes !

Well, I did it again! You would think after 40 years in commodities I would have learned that January stocks reports are always bearish... regardless of the facts.

After the experience of 1996, I should have sworn off January stocks reports entirely...

In October 1995, it became apparent that corn demand was going to outstrip supply in the upcoming season. We published a research report for our subscribers that illustrated what happens to markets when an exporter shifts to becoming a major importer. We called it the “whiplash effect.”

A “whiplash” market appeared certain for 1996 corn as China was moving from a net exporter to a net importer. Each week, we tallied how much corn China had purchased and reported the details to our clients. The corn market moved steadily higher into early November and we kept adding to our positions.

In November, the USDA surprisingly added acreage to their production report. Futures reacted quite negatively, even though production was reduced another 150 million bushels. March futures tumbled 17 cents in response. I had little choice but to take a loss on recently added positions and suffer the retrenchment in equity. How could the marketplace make a mistake like this?

However, our bullish posture was vindicated just a few days later when March corn moved on to new contract highs. I repurchased positions liquidated following the market’s mistake and vowed not to be shaken again by temporary misinterpretation of facts by technical traders.

Corn advanced strongly through December and I continued building my position. The Price Perceptions staff had worked diligently on estimating the upcoming stocks report that would be released in mid-January. Our research indicated the report would be the most bullish in history for the corn market... I added a few more positions.

Many in the trade warned of a big January setback as they expected farmers to become huge sellers in the new tax year. Some even advocated short positions because livestock producers were losing money due to high corn prices. I ignored the rhetoric as nothing more than market noise. After all, these non-believers had caused me to lose part of my position in November... I was determined to learn from the past!

Futures reached new contract highs on the first trading day of January. Then profit taking began to take a toll. March corn pulled back from the new high of $3.75 to $3.66 going into the stocks report. I used the setback as an opportunity to add even more to my long position.

The morning the stocks report was released, I was vindicated for all the hard work and effort... It indicated we would “run out” of corn before the crop year ended... The only alternative was for price to move substantially higher and ration out consumption.

The market opened four cents higher. I bought even more with the inexorable knowledge that we would run out of corn if prices did not trade a lot higher. Before I could even get my fills back from the pit, futures began to fall. By the end of the session, March corn had traded from a high (where I was filled) of $3.88 to $3.53 (where it closed).

How could this happen? I was well on the way to becoming rich that morning... and had a margin call I couldn’t meet that afternoon!

Needless to say, the corn market eventually vindicated our research and advanced to historic highs. The marketplace made a mistake! I should have learned a valuable lesson... Markets can defy obvious fundamentals for a short period of time, but cannot avoid the ultimate truth of supply/demand imbalances.

This year, I loaded up on soybeans in anticipation of bullish January reports. And once again, the market collapsed in spite of obviously bullish fundamentals. Although I have been forced to endure stress similar to the 1996 experience, I fully expect the market to recognize its mistake in coming weeks, as it did in 1996.

Experts tell us markets never make mistakes. However, with 40 years of experience, I will never be convinced of that trader’s axiom.

In commodities, you can be 100% correct in statistical interpretation and 100% wrong in near term market judgment. The only consolation in the market mistake of 1996 corn was... It proved to become one of the greatest buying opportunities in history!

Maybe the 2003 market mistake in soybeans will prove to become... an equally rewarding opportunity.

Bill Gary


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