Commodity Insight: Volatility is a two-edged sword

In the marketplace, price volatility is a two-edged sword. When it is in your favor, the odds of making a great deal of money are great.

When the volatility is going against you, the odds of losing a great deal of money are great. And when volatility raises its ugly head, seldom can you have it both ways.

There are two things to keep in mind when any market begins to turn volatile. One, no-one knows for sure what any market is capable of doing. Not for sure they don’t.

And because no one knows for sure the impact volatility will have on your portfolio, your brokerage account, your money or your mental health, always use a stop.

Avoid participating in any of the Big Four — stocks, bonds, currencies or commodities — without the use of a stop loss.

Over the past year since the Federal Reserve began hiking interest rates at the fastest pace in 40 years, the volatility with the entire Big Four has increased sharply.

Not only is that my personal opinion, but the opinion of many others, as well. Anymore, trading is not for the faint of heart.

This column is entitled “Commodity Insight” because it is about the commodity markets. But the commodity markets are not immune to what unfolds with stocks, bonds and currencies, the other markets that make up what I refer to as the Big Four.

All markets are linked together in some fashion and all markets are subject to volatility. And when volatility rears its head, investors and traders stand to make or lose a lot of money.

Here are just a few examples of volatile markets that have suddenly surfaced with commodities. On the final day of March, OPEC decided to reduce production of crude oil and prices rose sharply for a few days, eventually hitting $82 a barrel.

But quickly fears of less demand overcame fears of less supply and in early May, crude fell to less than $64 a barrel. What would crude oil prices have done had OPEC increased production?

Cattle futures posted a low in early May of $161.30, but one month later hit a new, historic high of $182.80. The rally was a record with a gain of $21 in a month.

Lean hog prices in the past three weeks fell $14 and suddenly turned higher and rose $16. In the short space of three weeks, hog futures endured a volatile swing of $30.

But from August 2022 to April 2023, summer hog futures dropped from $122 to less than $72. How is all that for volatility!

The May U.S. Department of Agriculture grain report pegged Kansas City wheat stocks to be the lowest in 16 years and prices rose dramatically on such bullish news. A few days after the report, KC wheat futures touched $9.19 a bushel.

But 10 trading days later, the market fell to $7.63 a bushel. And while KC wheat did a nosedive, Chicago wheat fell to a three-year low.

In a short space of two weeks, amid intense volatility, wheat prices went from the penthouse to the outhouse.

From Forex.com: Volatility is relative. Price changes that are considered a highly volatile period for one asset class, might be fairly tame for another. Broadly speaking, some of the most volatile markets you can trade are:

1. Cryptocurrencies.

2. Commodities.

3. Exotic currency pairs.

The group of ag markets about to experience exceptionally volatile price swings are grains, wheat, corn, soybeans and soy products.

The grains are now accurately defined as being a “weather market” due to hot and dry growing conditions in the U.S. Corn Belt. The last half of May and first half of June have been the driest and warmest in history and the crops are being threatened.

From AgWeb.com this week: “Drought concerns grow as 57% of corn, 51% of soybeans in the U.S. now considered to be in drought.”

Over the past few weeks in my twice-a-day newsletter and my Twitter account, @commodityinsite, I stated repeatedly: “If the Grain Belt does not receive ample rain in the next few weeks, a crop disaster could unfold.”

The corn crop needs rain and needs it now. The crop will pollinate around July 5 to 12. Historically, a corn crop is made or broken in July, a soybean crop in August. Without rain over the next few weeks, a crop disaster may unfold.

The grain complex has evolved into a weather market with prices on tap to trade in a volatile and fickle manner.

In the past three weeks, for instance, new crop soybeans have rallied a staggering $2.17 a bushel due to threatening weather in the Grain Belt. Sharp gains have also been seen with corn, wheat and soy products.

But keep in mind that volatility is a two-edged sword. It is great when it is in your favor. It is horrible when it catches you leaning the wrong way.