Those who are new to trading the agricultural commodity area, the dilettantes, the neophytes, and the wanabees, who have watched in awe as prices trended skyward for the past four months, may not be familiar with how they behave on the downside.
They got a harsh lesson in reality last week, when corn (NYSEARCA:CORN) posted a limit down move, the first since January. In my last piece on the ag space, I warned that prices were getting superheated, and that we were only one rainstorm away anywhere in the world from a limit down move (click here for “Wheat Melt Up Warning”). I therefore advised traders to switch from corn to hard red winter wheat, which had already spent a few months consolidating. That is exactly what we got in Russia a few days later, as one piddling little rain storm provided some respite to the hellish conditions there.
The move proved astute, as corn has recently dropped by 12%, while hard red wheat backtracked only 6%. I often remind readers that this is the market where prices take the stairs up, but the elevator down, and sometimes the window. You only need to work in the industry for 15 minutes before you meet a hapless trader who lost everything he had on one trade, because he didn’t exercise such caution.
I still believe that this is just the down payment on a major long term bull market for food (click here for my “Special Food Issue”). However, you always, always keep stop losses in place to protect yourself from the volatility.