Gemstone quality crystals have fascinated humans across the ages, due to their impossibility of angles, colour and transparency - compared to the bog standard rock (also mostly made up of crystals but too small to draw any oohs and aahs).
Crystals are used for everything, including jewellery, mechanisms in watches, cutting tools and (apparently) mystical healing. But what do crystals have to do with agricultural markets you may ask? Nothing in a literal sense - but metaphorically, let's talk.
Market participants perennially assess ‘value’ of assets, whether that’s a Wesfarmers share, the AUD or the standing paddock of wheat in September. But value is not fixed. It changes with the wind – literally, in the case of a standing crop in a storm. Anyone that follows something as volatile as crypto currencies would be well aux fait with how chaotic market value can be.
But if you are the holder of an asset, value is something inherently sticky. Farmers are net sellers of commodities and hence typically ‘long’ and, like all market participants, they are riddled with bias, which colours their perception of value.
For instance, Prospect Theory suggests that humans fear losses more than they value equivalent gains. We use terms like, ‘under-valued’ or ‘low-ball’ to assess someone else’s assessment of value compared to our own. Usually this is because we invest a certain amount of money, time and/or effort into the asset and that implies a base value (also called the Sunk Cost Fallacy). Sellers will keep incurring costs such as interest on debt or storage costs just so they won’t sell at a value that feels like a ‘loss’ despite worsening actual profitability.
Another fallacy is setting value at the price an asset was at a particular point previously. If lupin was $500pt last month and is now $480pt, the real value is $500pt. Except it's not. That’s called Anchoring. It's also influenced by Recency Bias in that, if that price was last month, then the anchor is stronger than if the price was reached last year. Combined with Prosect Theory, selling below $500pt is now interpreted as a loss and avoided.
This is where crystals come in. Accountants love to use the term crystallise to describe the point of locking in value. If a farmer sells lupin at $500pt, that will crystallise revenue. The point of the term is that the value has been hardened like a crystalline rock. That’s it - done. No ups and downs from there.
This might seem like the most Ollie the Obvious thing you have read this week but, in practice, it encapsulates the hardest thing to manage in markets. Timing. Value is nothing until it's crystallised. Lupin attaining $500pt, $550pt or $600pt is irrelevant if the sale was not executed.
Every seller hopes to ride the market wave to the peak and get off at the top before it rains in Canada and the value dumps faster than the shore break at City Beach. How many get it right? Not many – otherwise the market price would be a flatline months on end. Like Oprah, you get $500pt, the mob down the road get $500pt, everybody gets $500pt. But that doesn’t happen, which means the next phase is Hindsight Bias, resulting in regret. If the asset sold last month is now able to be sold for more, the seller keeps trading in their head and feels that they incurred a ‘loss’ or missed out. They are spewing if they sold at $480pt and Johnno at the pub sold for $500pt a month later. This thinking is flawed because it ignores the risk that it could have gone the other way, along with the opportunity cost of holding.
In the end, understanding and managing bias in assessing market value as part of your selling strategy is essential - that’s crystal clear.