DTN Six Factors: Looking at the Market in a Disciplined Way

There are a lot of opinions and theories about how to look at commodities markets. DTN created its Six Factors Market Strategies to simplify issues for busy farmers, and to cut through the noise to get at the most important details driving market directions.

This is the first in a series of articles on the Six Factors.

As I have come to learn and appreciate since joining DTN as a market analyst in 2013, the strength of the Six Factors is that, taken together, they force us to look at the market in a disciplined way. Our approach works because it brings together elements of value, fundamentals, seasonal influences and technical analysis in a way that allows us to see the market in a coherent, understandable way.

We group all the factors influencing markets into six categories: Trend, Volatility, Price Probability, Seasonals, Commercials and NonCommercials.

While none of the DTN Six Factors refer directly to traditional supply and demand analysis, solid fundamental analysis has been a part of the DTN thought process since the firm was founded. The S&D conversation usually centers around USDA’s latest estimates. Like Swiss cheese, every monthly World Agricultural Supply and Demand Estimates (WASDE) report has holes to be aware of and consider.

We focus on two USDA numbers. Grain stocks, which are reported only quarterly, are some of USDA’s best work and they offer healthy checks and balances on all the other estimates. If market players really want more accurate supply and demand estimates, we should all be petitioning USDA for monthly – not quarterly – grain stocks reports.

A second key USDA number we watch are ending stocks-to-use ratios. Those ratios are the ultimate metric analysts use to compare the surplus of the current season to past seasons and the ratios offer a clue as to where prices should trade. However, the correlation of stocks-to-use ratios to prices is loose.

Next: Price, Probability or Value