There are a lot of reasons why the market might react differently than expected when a major piece of information has come out. However, it seems like this has been happening with greater frequency in the grain markets over the past few years. While there might be a few reasons why, I’m not sure that we can fully figure this problem out, or if we even want to. It is not a problem that is up to us as traders to solve, but a situation to understand and, hopefully, profit from.
The March planting intentions report, and the April WASDE report were both bearish, especially for Corn. But on both report days, we saw the Corn market unchanged or rally. Most people, when they saw the Corn planting numbers, would have expected the market to be down substantially.
Let’s go back a few years to when the reports were released pre market. These were the days before algo trading (maybe that had something to do with it as well). Everyone was able to read the reports, process the information and decide their best course of action going forward.
Today, reports are released during the market day, at 11am. Algo’s are often the first to respond as they can process the information the fastest. Of course, they are just looking at pure numbers, preset conditions, entered by a human, and they react to that. They don’t have the ability to read the report, analyze all the conditions, and understand what it means going forward. That job will always be up to humans.
Because of the way the CME has set up the system, big algo “market making” is only done by a few large firms in the Ag world. You can see the evidence of the few firms in the minutes leading up to the crop reports as they slowly pull their bids and offers one at a time. Also, from time to time as one or more firms are making skew or volatility adjustments, they pull all their markets and you can see the bid/ask spread widen. The firms, and the money committed to this endeavor is a blog post for another time, but worth exploring on its own.
It seems that we have seen later than expected reactions to crop reports. Algos react, for whatever reason they have, and then us human traders are often chasing their markets, rather than processing and trading the information we have. The next day, once the information has been digested by the fund managers, traders, analysts, and people running the algo machines, the market has a chance to move on the real information released.
While it has, and always will remain true that that market can stay irrational longer than you can stay solvent, we contend that it’s important to consider the reasons the market isn’t doing what you expect. It may not be that the fundamentals aren’t what you think, or that someone has better information that you. But it might just be that the risk appetite of a major player has shifted from what it used to be. While large markets, grain futures just don’t have the number of eyes that the stock market does. Mispricings can and do exist, and we’re starting to see them more and more around major reports.