Brought to you by AG Concepts

Tuesday, October 03, 2017

Can a monkey with a dart beat the grain market?

By Andrew Whitelaw  |  Source: ACA, Melbourne Zoo

Key points

  • We have randomly selected the selling dates for a grain marketing program for the past seven years
  • Overall the randomiser tracks the market quite closely.
  • This is largely as a result of chopping marketing into bitesize chunks.

2017-03-10 Grain Fig 1

At Mecardo, we believe having a strategy for marketing grain production is extremely important, using whichever tools are available to improve returns. Nevertheless, we like to test theories (and have some fun). In this analysis, we examine the question “Can a monkey beat the market?”, and some thought-provoking insights are unveiled.

There are many different aims when marketing grain, many want the top of the market. Hitting the top is a great aim, but very hard to achieve, as we never know where the high was until we are coming back down the peak. Overall, I think a more achievable objective is to aim to meet (or exceed) the average price in a given season.

In this analysis, we decided to run some randomised scenarios to determine when sales should be made during the past seven seasons, so therefore like a monkey throwing a dart at a board. The APW1 price in the Geelong port zone has been selected for 20 parcels, utilizing a marketing period of 1st October to 30th June. This period was selected to coincide with the typical program for growers around Australia.

In this analysis I have created a randomiser, which indiscriminately selects the selling dates for each season. In figure 1, I have displayed the 1st iteration which the randomiser created. As is clearly illustrated, in reality the price closely follows the market. In fact, for this iteration only 2015/16 & 2016/17 are out by more than ½¢ either way!.

In table 1, we have shown 20 different iterations, with the difference to the season average. There are a wide range of variances between the average season price, and the monkey traded average price, however, overall the monkey does not perform that far from the average.

In equity trading it is often reported that actively managed portfolios are typically outperformed over time by index funds which only track the market. This also works with grain, and if you want a hands-off approach to marketing this can work either through an index based or averaging tool* or through utilising a disciplined approach to your selling.

*There are tools available which are intended to provide an average return including the index program 'Agfarm Advantage', and also the AWB Market Ultra & Pacer Ultra

What does this mean?

In reality, there is a serious point to this analysis. The key to trading is to be consistent, remove emotion and be disciplined.

This analysis was an extreme example, where complete random selection is utilised and we would never recommend selling based on random chance (or employing a monkey).

Nonetheless, using 20 parcels between October and July will typically give a large enough exposure to create a close to average result.

If we combine a defined selling plan, with an element of flexibility, the result should be greater than a monkey with a dart. 

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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