Fundamental Approach to Futures Trading

Using fundamental analysis can help in the decision making process.

Fundamental analysis relies on commodity supply and demand data to make price projections. National supply and demand figures indicate how much supply of the commodity there is for the marketing year and how much will be used for a marketing year. For corn and soybeans, the marketing year begins on September 1 and ends the following August 31.

There are two major components that make up the supply side. First is the level of beginning stocks, which represents how much of a commodity was left over after the previous year. Beginning stocks vary significantly from one year to the next. Production is the second part of the equation on the supply side. How much acreage was planted and what were the average yields determines production levels. Imports from other countries, a third component, are relatively small and therefore not a major consideration on the supply side.

The demand side is made up of domestic feed use, exports, and industrial uses. Domestic feed use has some variability depending upon livestock numbers on feed in a given year. Domestic feed use is the largest category on the demand side.

Exports are variable due to production successes and failures in other countries, as well as the value of a particular nation's currency. When the US dollar is strong compared to other currencies, it becomes more difficult for other nations to buy US products.

Increased ethanol production and use in the US has helped to increase the use of US grains. New and innovative ways to use corn and soybean products such as corn sweeteners and soy oil are increasing consumption of US farm commodities each year.

Once the supply and demand information is gathered it must be turned into price projections. The USDA also releases projected average price for the marketing year. A very important indicator is the level of ending stocks. This number is expressed as a percent of the total use of the crop. This is called the Stocks-to-Use Ratio (SU). For corn, there is a substantial correlation between the SU ratio and the futures price, but is also weighed along with other factors such as weather and intended plantings of a crop.

We believe that in the next 5-10 years major price swings will occur in the futures and options markets due to supply/demand shortage caused by growth in China and increasing economic price inflation (the easiest way to pay down debt). If we can identify potential supply shortages in a market before it occurs, than it is possible to generate multiple 100% type of return compare to risk. Examples are the huge uptrend in Oil, Gasoline, Copper, Cattle, and recently in Grains.

Our 30 years experience in of commodity and futures business has giving us contacts with several industry leaders and traders and has allowed us to select markets with the potential to rise or decline by 50% or more. With this approach, we expect to experience at least 100% increase in account value within a 3 years period. Our goal is to limit the risk to 50% decline of peak value of the account.

We will tend to look for price moves in a particular market that are 3-6 months hold period.