What tools can we use to help us decide when to enter and when to exit a hedge? (Or, or for that matter, when to enter and exit any trade.

Transcription

1 Motivation for Fundamental and Technical Analysis What tools can we use to help us decide when to enter and when to exit a hedge? (Or, or for that matter, when to enter and exit any trade.) So, how do we know when to pull the trigger and make the decision at the top of the T-account? Evaluated forward price, often calculated costs, expected rates of return, rated risk and calculated probabilities of certain outcomes. But, while they support the decision, we need more tools to make the decision. We need to expand on the decision making process. We need a systematic way to make trading decisions. We need objective tools that say act: Buy or Sell now. Fundamental Analysis: Price determination techniques used to establish the likely magnitude of future price movements and reasonable price-level objectives. Technical Analysis: Techniques used to understand patterns in the price discovery process. These patterns can be used to identify buy and sell signals. This is what commercial traders (large hedgers) and successful speculators do. AREC 412 Lec H Motivation 1

2 Example) DEC 2017 Corn: AREC 412 Lec H Motivation 2

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4 Example) DEC 2017 Live Cattle: AREC 412 Lec H Motivation 4

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6 Example) NOV 2016 Feeder Cattle: AREC 412 Lec H Motivation 6

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8 Example) JUL 2018 KC Wheat: AREC 412 Lec H Motivation 8

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10 The process of the trading-public doing this work, this analysis, contributes to price discovery. It is the discovery and synthesis of existing supply and demand information into price. Correct trades are rewarded and incorrect are not... Informed traders make money at the expense of uninformed traders. Are we going to be able to trade and make greater than risk-adjusted profits? Not in the long term. That s not what the purpose is. But we want to be informed and make good pricing decisions as opposed to being reactionary and/or following emotions. The purpose is that these tools are better than what we would use without them. That is an important point: if you don t do fundamental and technical analysis then what will determine, drive, or impact your trading? AREC 412 Lec H Motivation 10

11 Fundamental Analysis: Livestock (Nonstorable Commodities) The industry in question faces a demand curve which originates at the consumer level and is passed down to the farm-level through marketing firms. At any point in time, there is a fixed quantity supplied and future supplies are predetermined. We need to forecast the changes in supply and then forecast the changes in demand. The quantity supplied will be consumed. The quantity supplied equals the quantity demanded so that prices adjust to clear the market. AREC 412 Lec H Fundamental Analysis: Nonstorables 11

12 Example) Assume it is 9/22/2017. We want to forecast the live cattle futures price for December Supplies will increase/decrease in 12/2017 compared to 12/2016? Live cattle futures price for DEC 2016 settled $114.50/cwt. Currently, DEC $ Buy it or Sell it? P $ $? Q AREC 412 Lec H Fundamental Analysis: Nonstorables 12

13 Making use of predetermined supply numbers: Ex) Fed cattle monthly Cattle on Feed reports On Feed(t) - Marketings(t) + Placements(t) - Other Dis(t) = On Feed(t+1) Think stock and flows. Ex) Hogs quarterly Hogs & Pigs reports Farrowing Intentions, Farrowings, Market Weights, and Market Hogs. All information is a snapshot of stocks. Ex) Crops Planting Intentions, Acreage Planted, Crop Conditions, Crop Conditions, Crop Yield Estimates, Crop Yields, and Acreage Harvested. AREC 412 Lec H Fundamental Analysis: Nonstorables 13

14 Forecasting using elasticities. Steps 1) Estimate future supplies (% S). 2) Estimate future shifts in demand (% D). 3) Compare changes to base year within the same season and forecast price. 4) Qualitatively evaluate the forecast. From where do we get elasticities? AREC 412 Lec H Fundamental Analysis: Nonstorables 14

15 Forecasting using elasticities. Steps 1) Estimate future supplies (% S). 2) Estimate future shifts in demand (% D). 3) Compare changes to base year within the same season and forecast price. 4) Qualitatively evaluate the forecast. From where do we get elasticities? 1) University research reports (Land Grant Library) 2) USDA research reports (Economic Research Service) 3) Collect data and estimate AREC 412 Lec H Fundamental Analysis: Nonstorables 15

16 ex) Farm-level beef cattle elasticities ε bb = % Q b / % P b = ε bp = % Q b / % P p = ε bc = % Q b / % P c = ε bi = % Q b / % I = From: Wohlgenant and Haidacher. Retail to Farm Linkage for a Complete Demand System of Food Commodities. USDA Economic Research Service Technical Bulletin Number December (You can find this research on the web.) These estimates describe consumer demand. Please be able to explain each: 1% and 10% changes. AREC 412 Lec H Fundamental Analysis: Nonstorables 16

17 ex) Forecast DEC Live Cattle futures price Out Wt In Wt Days on Feed Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec The information we have with cattle are placements into feedlots. So we are forecasting future marketings with placements. But there is also the need for more information than animal numbers animal weights are also needed because numbers multiplied by weights are total production and it is pounds of beef that consumers purchase. (Now, you need to do something similar using the different information in the Hogs & Pigs report ) AREC 412 Lec H Fundamental Analysis: Nonstorables 17

18 Ex) Problem Set 3 Hogs & Pigs Report released end of June and numbers as of 6/1 farrowed on 6/1 50# on 6/1 120# 180# 280# Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May AREC 412 Lec H Fundamental Analysis: Nonstorables 18

19 Supply information as of 9/1/2017, available 9/22/2017 Cattle placements from monthly 7-state Cattle on Feed report (9/23) 1000 Head Month /16 May June July August 1,889 1,525 1,572 1,879 2,119 1,770 1,615 1, Steer carcass weights from monthly Livestock Slaughter report (9/22) Month Change August % We will make the assumption that the percentage increase/decrease in placements will materialize as the percent change marketings 150 days later. We will also make the assumption that the increase/decrease in slaughter weights will persist. AREC 412 Lec H Fundamental Analysis: Nonstorables 19

20 We need to generalize... Can you construct a better method to forecast future fed cattle numbers?... and fed cattle slaughter weights? But, what if you want to forecast supplies past five months in the future? AREC 412 Lec H Fundamental Analysis: Nonstorables 20

21 Total % S = % Numbers + % Weight +2.7% + (-0.8%) = +1.9% Forecast DEC price based on supply information. ε bb = = % Q b / % P b = (+1.9%) / % P b = (+1.9%) / % P b % P b = (+1.9%) / = -2.2% $ ( ) = $111.94/cwt. ($2016) $ (1.019) = $114.07/cwt. ($2017) AREC 412 Lec H Fundamental Analysis: Nonstorables 21

22 DEC Live Cattle Price Forecast P $ Q Using only changes in supply. AREC 412 Lec H Fundamental Analysis: Nonstorables 22

23 The Demand Side... See the handout. Inflation rates and deflating example: Inflation rate = (CPI new)/(cpi old) = 245.0/240.4 = (+1.9%) Deflate example: (Price new)/(price old) = (CPI new)/(cpi old) $98.135(1.019) = $ inflate example $100 / (1.019) = $ deflate example AREC 412 Lec H Fundamental Analysis: Nonstorables 23

24 DEC Live Cattle Price Forecast P $ $ $ Q Using changes in supply and demand. AREC 412 Lec H Fundamental Analysis: Nonstorables 24

25 Evaluating Price Forecasts (or why your price forecasts will be wrong) Supply flexibility or inaccurate supply projections. Inaccurate demand shift projections. Changes in retail or wholesale to farm margins. Changes in international trade. Changes in tastes and preferences (gradual or sharp). Inaccurate inflation projections. Changes in government programs. Survey errors Rounding errors. AREC 412 Lec H Fundamental Analysis: Nonstorables 25

26 International trade is a big uncertainty and hard to forecast Need to ask what-if questions. What if fed cattle imports doubled? What if halved? What if beef imports doubled? Halved? What if beef exports doubled, halved, or were reduced to zero? AREC 412 Lec H Fundamental Analysis: Nonstorables 26

27 Forecasting using derived demand. Steps 1) Forecast output price at the end of production 2) Estimate production costs (+ normal profits) during production 3) Forecast input price at the beginning of production 4) Evaluation forecast P Q AREC 412 Lec H Fundamental Analysis: Nonstorables 27

28 MAR Feeder Cattle Price Forecast P Q AREC 412 Lec H Fundamental Analysis: Nonstorables 28

29 MAR Feeder Cattle Price Forecast P Q AREC 412 Lec H Fundamental Analysis: Nonstorables 29

30 You also need to see the big picture... Forecasting with elasticities can be conducted at any level in the system retail, wholesale, or farm. Once you have that level then levels below in the marketing system can be forecasted with derived demand. For example, we forecasted fed cattle and then used derived demand for feeder cattle. We could forecast boxed beef and then use derived demand for fed, feeder cattle, and calves P Q AREC 412 Lec H Fundamental Analysis: Nonstorables 30