Grain marketing may seem easier if you can break it down into digestible chunks, says Darin Newsom, senior marketing analyst for DTN. He says there are six key factors that can give a hedger insight into what the market is saying. Take them one at a time, and they're not hard, he says.

"Each has its own personality and meaning, independent of the other five," says Newsom. "However, when combined, they paint a clearer picture of not only what the market situation is but also which hedging tools would work best in a particular situation."

"A good friend once taught me that you should be able to write your strategy down on a single note card. These six factors reflect that lesson and help decipher what the market is trying to say at a given time."

General market trend

This is simply the direction of the market. It takes into account all technical and fundamental factors as perceived by the collective judgment of the various traders - commercial, noncommercial, large, small - in the market.

"The first step in deciding what type of market exists is to determine the direction," says Newsom. "The three basic trends are up, down, and sideways." He says that looking at different time frames can give vastly different looks to the price direction. He favors using the weekly or monthly continuous price chart to create a longer-term look at market direction.

Percentage of open interest held by large speculators

This is calculated by using the weekly CFTC commitment of traders report that shows the number of contracts long or short that large speculators hold in a given commodity. Divide it by total open interest for that particular commodity.

"Large speculators are a growing force in the commodity markets," says Newsom. "By one report, total fund equity in commodities has grown to more than a trillion dollars.

While hedgers may be irked by this fact, it should be remembered that large speculators can be both a hedger's best friend or worst enemy, depending on the trend of the market. This is because heavy fund trading will overextend a move, regardless of direction."

He points to last year's soybean market as an excellent example of a market that was taken too high, then possibly too low, by large speculator activity.

Historic price probability

This is a measure of the percentage of time the market trades over a given price level historically. If a contract has a high probability percentage of 90%, for example, it means that only 10% of the time has that contract traded below that level. The other 90% of the time it is at or above that price.

Hedgers can use this percentage in different ways, says Newsom. Knowing the probability prices will move higher or lower can help a producer decide whether or not prices should be locked in. And it can help determine if options (puts or calls) should be purchased or if futures contracts should be used.

Seasonality of the market

By constructing a seasonal index (weekly or monthly), a hedger can tell how a market tends to trend during the marketing year. "It needs to be remembered that seasonal indices are only averages, not absolutes," says Newsom.

"Hedgers may also find the use of analogous years (specific years where fundamental factors are similar) helpful when studying tendencies."

The percent of carry in the market

Full carry indicates the market's willingness to pay someone commercial storage and interest to hold the cash commodity and sell later. It is calculated by using the nearby futures price multiplied by commercial storage costs and interest rates over a set period of time.

The percent of carry in the market is the difference between the deferred and nearby futures contract divided by the calculated full carry for that time. For example, if the difference between a deferred contract and the nearby is 8¢ and full carry is 10¢, the percent of carry is 80%.

"That indicates the market isn't looking to generate cash sales at the time," says Newsom. "But it is willing to pay 80% of full costs to someone to hold the grain until later."

The opposite of the carry market is the inverted (or backward) market. In this market, the nearby futures price holds a premium to the deferred. It tells you that the market is calling for cash sales now, rather than later

Option volatility

Hedgers often complain that options are too expensive and seem to go off at zero value. "While some of that is true, the proper use of options depends a great deal on the volatility percent," says Newsom. "If it is high (the upper 20s to low 30s), the option premium is probably overpriced and not a good buy. If the volatility is in the upper teens to low 20s, premiums are likely underpriced and offer a buying opportunity."

Conversely, if a hedger owns an option and the volatility rises into the high range, premiums again will be overpriced. That gives the opportunity to sell out of the option and possibly roll into a hedge position.