Agricultural Marketing ECON 337: Agricultural Marketing Chad Hart Associate Professor chart@iastate.edu 515-294-9911 1

Seasonal Patterns A price pattern that repeats itself with some degree of accuracy year after year. Supply and demand Often sound reasons Widely known Linked to storage cost or basis patterns in grains Linked to conception and gestation in livestock

How to Calculate Seasonal Index Pick time period (number of years) Pick season period (month, quarter) Calculate average price for season Calculate average price over time Divide season average by over time average price x 100

Iowa – S. Minnesota Live Cattle Prices Total All Grades, $/cwt Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual 2004 81.30 79.55 85.49 86.90 88.16 89.64 84.04 84.15 81.27 82.43 82.37 85.39 84.22 2005 88.36 87.48 92.37 91.92 89.03 83.09 79.66 80.11 83.83 86.61 89.16 92.84 87.04 2006 92.96 89.70 86.07 82.25 79.74 81.72 80.90 85.41 88.03 87.24 86.17 85.76 85.50 2007 87.30 90.17 96.90 98.69 96.28 88.02 89.07 91.45 92.46 89.98 91.21 91.03 91.88 2008 90.27 90.49 89.39 89.86 93.22 93.90 98.02 98.34 95.32 87.21 88.42 83.93 91.53 2009 83.15 80.31 81.79 87.55 85.26 81.61 82.39 82.06 81.52 80.71 81.85 81.54 82.48 2010 84.70 87.26 92.30 98.77 98.03 92.60 93.34 94.83 96.06 97.43 98.68 101.93 94.66 2011 105.63 108.04 117.94 119.89 111.74 109.60 112.52 113.83 116.54 120.11 125.20 124.57 115.47 2012 123.85 124.37 127.38 123.27 121.82 121.27 114.93 118.77 123.40 123.72 125.73 125.45 122.83 2013 125.24 124.30 126.00 127.17 126.42 122.20 121.19 123.97 123.76 128.55 130.68 131.69 125.93 Average 96.17 99.56 100.63 98.97 96.37 95.61 97.29 98.22 98.40 99.95 100.41 98.15 Ratio 98.1% 98.0% 101.4% 102.5% 100.8% 98.2% 97.4% 99.1% 100.1% 100.2% 101.8% 102.3%

Using Seasonal Index to Forecast Observe price in time t1 P1 Forecast price in time t2 P2 Start with P1/ I1 = P2 / I2 Then P1 x I2 / I1 = P2 Assume that cattle are selling at $141.61 /cwt in January. What is the forecast of July? PJan x IJul / IJan = PJul $141.61 x 0.974 / 0.981 = $140.78

Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

Estimated Returns to Finishing Yearling Steers During 2003-2013 the range in profits was -$306.51 to $377.94 per head 31.1% (68.9%) of the months profitable (unprofitable)   Months of Percentage of Months with Profit (Loss) Month sold Profit Loss January 27.3% 72.7% Over $100 = 7.58% February 9.1% 90.9% $80.01 to $100 3.79% March 45.5% 54.5% $60.01 to $80 6.06% April $40.01 to $60 May $20.01 to $40 June 36.4% 63.6% $0.01 to $20 July -$0.01 to -$20 11.36% August -$20.01 to -$40 5.30% September 18.2% 81.8% -$40.01 to -$60 9.85% October -$60.01 to -$80 6.82% November -$80.01 to -$100 December Under-$100 28.79%

Dramatic Changes Have Taken Place

Estimated Returns to Farrow to Finish During 2003-2013 the range in profits was -$53.63 to $46.82 per head 55.3% (44.7%) of the months profitable (unprofitable)   Months of Percentage of Months with Profit (Loss) Month sold Profit Loss January 18.2% 81.8% Over $25.00 = 21.2% February 54.5% 45.5% $20.01 to $25.00 5.3% March $15.01 to $20.00 3.0% April $10.01 to $15.00 11.4% May 72.7% 27.3% $5.01 to $10.00 6.8% June $0.01 to $5.00 7.6% July -$0.01 to -$5.00 August -$5.01 to -$10.00 September 63.6% 36.4% -$10.01 to -$15.00 8.3% October -$15.01 to -$20.00 3.8% November -$20.01 to -$25.00 December Over -$25.00 16.7%

Seasonal Pricing Patterns Source: USDA, NASS, Monthly Price Data 1980-2013

Corn Pricing Patterns Source: USDA, NASS, Monthly Price Data 1980-2013

Soybean Pricing Patterns Source: USDA, NASS, Monthly Price Data 1980-2011

Charting Channel lines

Sell Signal A sell signal is one close below the charting lines

Buy Signal Some chartists need only one close above the charting line to create a buy signal, others use two closes above. Buy signal

Resistance and Support Resistance level: A price level where the market seems to hit and bounce down Support level: A price level where the market seems to hit and bounce up

Key Reversal A key reversal is when the daily high and low price range exceed the price range for the previous two days.

Gaps Gaps often occur when a major new piece of information hits the market. They are often filled in by later price movements.

Double Tops & Bottoms Double tops and bottoms show prices with major technical resistance. These can be several days apart.

Head & Shoulders Source: Figure 7, Charting Commodity Futures Ag Decision Maker, File A2-20

Moving Averages 9 day average 18 day average 40 day average Sell signal Buy signals

Relative Strength Index Looks at last X days worth of closing prices X = 9, 14, 30, etc. Summarizes upward and downward price movements during the period Record the last 14 days worth of price changes, based on closing prices Sum the positive and negative price changes and create average for each Relative Strength Index = (Up average/(Up average + Down average))*100

RSI for Nov. 2014 Soybeans

Relative Strength Index RSI’s above 70 (80) are considered signals of a market due to decline RSI’s below 30 (20) are considered signals of a market due to rally

Does Technical Analysis Work? Arguments for it: Real world markets are not perfectly rational Markets may be slow to respond to new information Technical analysis works with the psychological biases It works because so many people use it Self-fulfilling Arguments against: Efficient market hypothesis The current price holds all of the relevant information

Class web site: Have a great weekend! http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2017/ Have a great weekend!