Markets and Emotions

Cloudy day on Lake Minnetonka

The old school way of thinking about markets was that anything traded with money was a rational exchange. Any trades involving domestic issues- family, health and well being and so on- were emotional. The world of men was based on pecuniary calculation. The world women was based on the heart. Thankfully such views are considered old fashioned.

Markets are the culmination of thousands of choices, but sometimes the people behind them are reacting with emotion. Take the corn and soybean market this spring as reported in Successful Farming:

The corn and soybean markets have had a tumultuous last three months. A significant rally in both was followed by a sell-off, then a recovery to challenge highs and then, another sell-off.

Each of these moves has been more than the markets have rallied or dropped in over five years. Corn futures peaked on May 7, rallying more than $1 in three weeks. Dry conditions affected the second crop corn in Brazil, otherwise known as safrinha crop. This was on top of a rally of more than $1 since fall. Just as quickly, December futures lost $1.38 on good U.S. planting progress. They then rallied sharply for the second time, with futures peaking at $1.28, as dry weather in the U.S. became a growing concern.

Farmers have the option to pre-sell their crop through the spring and summer. And often this is done in segments, so it is not a one and done decision. Needless to say, following worldwide ag conditions and gleaning insights into pricing can be stressful.

All this volatility can become exhausting, leading one to believe there is no real way to figure out markets and, therefore, perhaps the best thing to do is nothing.  While understandable, this can be an expensive perspective.

When December corn futures rallied and traded above $5.50, it was a price that hadn’t been seen in seven years. When prices peaked at $6.38, this was even better, and farmers who did not sell at $5.50 were happy. Yet, in a very short time, prices dropped from $6.38 to $5.00.

For over a year and a half, the strong sellers’ market in housing has forced buyers to bid on homes in multiple offers. The listing price is set, but there is no way to know what other parties are bidding. In addition to offer price, closing date and terms come into play. Through the experience of making an offer, and failing to secure the winning bid, buyers learn what it takes to be successful.

What never gets dull is watching how the bulk of the buyers will bid within a relatively small variance. Independ of each other, without knowing more than a list price, out of eight bids on a house, five are likely to be within 2% of each other. It’s the bid from the buyer who has had enough, who has looked enough, or who wants it bad enough, which will reach high and secure the home.

The emotion for the farmers and home buyers is over fleeting opportunities, one for annual income and the other for the place they plan to live out their lives. But emotion doesn’t mean markets aren’t working. Emotion is just another feature. Just like the sentiment that goes into owning a Crist Craft, like the one in the photo, to splice through the waves on Lake Minnetonka.