Making sense of market dips
On Tuesday, both Hard Red Winter and Soft Red Winter dropped over 4%, marking the largest single-day decrease of 2021 for SRW, and the 5th-largest for HRW. While dips like these can be intimidating for farmers that are looking to offload bushels in the immediate term, understanding the larger picture can be paramount to driving long-term profitability in your operation. In today’s post, we analyze the historical impacts of these dips.
To begin our analysis, we’ll look at the last five years of wheat prices, for HRW, HRS, and SRW. For each day, we can calculate the percent change in the closing price compared to the previous day. Here’s a summary of the largest single-day decreases (in the last five years) for each type of wheat:
Notably, the greatest decrease for HRW & SRW occurred on the same day, which makes sense given the high correlation between the two.
In order to analyze the impact of these large, single-day dips, we’ll take a look at the price movement in the days following the dip. For simplicity, we’ll evaluate the price movement five days, ten days, and thirty days following a day with a decrease of 4% or more. In the last five years, HRW has had 13 trading days with a decrease of 4% or more, with HRS and SRW each having eight. Here are some visualizations showing the 5-day, 10-day and 30-day price movements for each type of wheat when one of this dips occurred:
A couple takeaways from these charts—first, you’ll notice the yellow dots are typically farther away than blue or red, which makes sense— given a full thirty days, prices have more time to move. Second, HRW and SRW appear more “squished together” than HRS. This could suggest that HRS is more volatile than the others, meaning that in the same period of time, HRS prices could increase (or decrease) with greater magnitude.
So, should you be paying attention to these dips? Let’s take a look at the average movements for each type of wheat:
On average (over the last five years), following a day with a 4% decrease, HRW prices have moved downwards another 5.06% in the following five days. Historical insights such as this are obviously never indicative of future returns, but they provide a helpful baseline for you to set expectations around what prices could do. In a different light, although HRS prices typically decrease 2.36% in the five days following a dip, on a thirty-day horizon, prices have actually increased by almost 17%. And lastly, while SRW prices exhibit similar movements to HRW on the 5-Day horizon, longer-term effects are negligent, with 30-day movement averaging less than 1%.
When it comes to interpreting large dips such as those that occurred earlier this week, historical insights can be a crucial tool to help you set expectations and manage risk. Trying to time the market in the short term is extremely difficult (and risky), but a solid understanding of historical movements can be an integral part of your decision-making process. Subscribe to Farmstack today and get more insights like these right to your email.
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