In the second part of our interview with farmer turned grain marketing advisor Dennis DeLaughter, we dig into the components of his technical system: how it rapidly identifies elevated risk, keeps farmers within the top 25% of the market price, and handles unexpected situations like derecho and COVID-19. Plus: Dennis discusses what strategies he has turned to more and more over the years, as well as the ones he has kept away from.
Dennis: When I first started managing a grain elevator, which was in 1979. So it's been awhile. I actually went to a top farmer. I think it was top farmer. I'm not sure now, but I think I went to a top farmer meeting on charting and I went through the charting school with them. And of course then I just, I just loved the technical side of it from that standpoint. And then I saw a book and I bought it from Jay Wells Wilder. And when I bought that book, it was an eye opening. I mean, it literally changed my life. That one book, I call him the father of technical trading. He put together some of the things that people use today that they don't even realize that he was the one that did. And I began to realize what those numbers really look like. And that started me down the road.
When I started going to the floor in Chicago, I literally took a computer with me and it's kind of a, kind of a funny story, but I'm a guitar player and I had some extra guitar cases and I literally made a guitar case that I could carry that had a computer in it. And so I would go up there and I would trade during the day. And then at night I would get on that computer and try to put what I had seen during the day into code on the computer. And it started me down that road of, of the technical side of the market. And, and so that's what, that's what I, that's what I've done
Rodney: The book, by the way. I think you're talking New Concepts in Technical Trading Systems. That's all right. Yep. That's the name? So for anybody that's interested, you know, you talk about using volatility based trades as a way to, to reduce risk I've I will say I've, I've made some very big wins and losses trading volatility. So I'm wondering if you can go into a little bit around how you make sure, you know, how you're ensuring that the risk you're taking is really reduced in nature with that volatility exposure. So I understand it's a very different category than market direction, but you know, how do you make sure that when you're putting on these positions for yourself or on behalf of others, that, that they are operating kind of within the constraints that you're looking for? So things don't get out of hand?
Dennis: Well, we have constraints based off the systems that we use, I mean, not being able to show you the exact system, but if you, if you saw the system, you would see where it gets to a place where we have what we call elevated risk. And so what we do is when we see that elevated risk, again, we're looking the time horizon, what percentage of the crop is really at risk during this period of time, because you will find, if you go across a, if you go across a year, maybe the closest thing to do would be to talk stochastics. If you look at a stochastics chart, you'll see that stochastics have a tendency to go up and down within a range. Over a period of time, we have a similar system that's built differently. It's built differently than statistics is, but it does the same thing.
It points to a situation where the technicals have gotten to a place where it says, Hey, there's risk in the market. You probably should. You probably should be laying that risk off here. And then it based, based off the time horizon, that would, that would set us up as far as what percentage of the crop we might, we might do a, we might do a sophisticated option strategy where we are still open to the upside. If we're on this, if we're, if we're looking to protect ourselves to the downside. So we might do try to do a, a three-way or a combo trade in order to allow us still to be wrong and capture some more of the move to the upside. But what we're looking at is that a risk reward situation, where we feel like the markets are vulnerable to pull back.
Rodney: That's really good, Dennis, while masking this question, go ahead and take a drink of water. Cause I feel like you're going to have a lot to say. It seems like you've worn three hats here, right? So you've been a farmer. You've been a grain merchandiser, which is different, right? And you've been, I'm going to call it a speculative trader. I love to hear how those three trading systems are different. What's unique about each of them. And I'm certain I'll have a thousand follow-up questions when you're done explaining that.
Dennis: Well, the difference for me the last two years has been that I don't have the crop. I don't have the corn crop or the rice crop that I am actually hedging. So it has taken me away from the personal side of being the hedger. Now I am doing that for my clients. And I'm saying that if I had a crop, this is what I would do from a speculative standpoint. I really don't speculate very much. I know that that's probably hard to believe when you've got all this technology and all these accounts and you can, and you can certainly do that. I have been asked many times to set up a speculative program or a speculative hedge, not a speculative hedge, but a speculative, a trading component or our pool. And I just don't have to be honest with you. I just don't have a great interest in doing that.
And people will say, well, that's because you're probably not that successful. And that's really not. That's not the case at all. I mean, you just have to talk to clients about that part, but all I can do is tell you that I'm really interested in the risk of the market. I look at a client and I ask them the question, are you highly leveraged or not highly leveraged? Or where are you at? And then I really take on the responsibility of making sure they don't live through some type of a downturn that could end their farming career. I'm looking at the risk – I get rid of it. And so that's what, that's the way I play that part of it. If I'm going to speculate, I am a natural born bear. So I prefer to speculate from the short side of the market.
So that's the first thing you should know yourself. So I prefer doing that. If I'm going to speculate, I will probably speculate using an option strategy just because as a broker, I can, I can do that as cheap as anyone. So I feel like that is, that would probably be the way I would do it, but I don't do much of that. I'm pretty much geared at what I do. And I just, I just hold to that because the fact of the matter is speculating. You can be right, or you can be wrong, a hedger. If you're really hedging, if you're, you're not wrong, you're, you're actually laying off the risk. That means, especially if you're in the, on the board, you're, you're making on one side and losing on one side that's what's, that's, what's caught why it's called hedging. So that's, that's kinda how I, how I approach it.
Gabe: So, Dennis, I know we're kind of pushing around the edges of like what different philosophies are around approaching the market. But I just want to say, I think part of what Rodney and I are trying to do is, is get a handle on and I'm seeing it line up here, you know, would it, would it be reasonable to phrase or re paraphrase? What you've said is you're not really, somebody wants to trade the high price of the market or the low price of the market. You're not going to get them there. You're, you're here to help them have a consistent plan and kind of make, make some decisions and make sure they're wearing the risk that they want over time. But, but you know, if they want highs and lows, they probably need to go somewhere else. Is that fair?
Gabe: I think I would say it this way. My objective is to be in the top 25% of the market range. That's my objective. And I think that that would be successful if you can lock in and get most of everybody priced in around 25% of the upper side of the range, that's, that's gonna, that's gonna work. You're always going to have asterisks that go on on charts. There's always going to be something that will come in, that there was no way to know that that was going to happen. And you're behind the curve, but in general, that's where I start. And that's where I want to be. So now you have to come up with that range. Where do you think that range is going to be? Well, now you're going to supply and demand tables and calculate what that would be for the year.
Dennis: What would be the high yield, low yield based off acres? What are the acres numbers looking like? And you come up with that type of range, and then you trade inside that, but you're looking to try to be in that upper upper portion of the range I trade. One of the things that I do from a technical standpoint is I trade intraday. So I'm looking at not daily charts, as much as I might be looking at a, at a, an hourly chart or 120 minute chart. I'm looking at those because they're going to lead the way on a day chart. That's a, that's basically how that's going to be. And we get the same type of indicators on those. And so that would tell us too, that there's probably some elevated risk. You may want to be thinking about laying it off, but at the same point in time, if we're not in that top 25% of the range, I might completely forego the trade and say, I think we're going to pull back here a little bit, but we still probably have some higher levels to go. So that's kind of the approach with all of that.
Gabe: So when we, yeah, I know one of the things that we're excited about having you, you know, do do your managed pricing program through, Indigo is that one of the versions of it is going to be focused on cash prices. So in those markets, you know, we're like Texas, where you're helping folks make those cash price decisions. Are you still leaning on the futures to help decide kind of what timing is around pricing? Or are you using other inputs there?
Dennis: Think of the futures as kind of a hint to what is going to happen with the cash market in Texas. I mean, that's the way I look at it. Here's what's not going to happen. The price of rice in Texas is not going to go to $20. And while in Arkansas, it's going down to 10. That's not going to happen. There is that always that restraint, there's always that connection. So the futures market gives us a little bit more idea of what may be happening in the cash rice in Texas. So from a Texas standpoint, we still like to say, we still use the futures market. So if you've got a basis right now, that's a trading like a dollar $40 50 over the board. Well, you start seeing that as a type of a basis, then you're kind of pressing your luck. So you start telling guys, you know, this is, there's some risk here in the cash market.
You may want to lay that off. And if you still think the market's going up, go down and buy the board, you know, so you, you basically lock in the basis and then you could do it that way. The other thing to remember, and this is always forgotten when, when, when you're not in the rice business itself, is that one of the, the main issues with producers right now is the PLC program. So we also have to say, what is the risk of losing a PLC payment? If we, you have a farmer that sells everything down here in the cash market. And all of a sudden Iraq blows Iraq comes in and starts buying rice. Everything turns really negative in Uruguay, Paraguay, and Brazil, and all of a sudden the market explodes. Those guys are going to lose that PLC payment. And that's critical when they've sold rice at levels in the cash market that are not profitable.
So we also have to put that in the, in the equation. So there's all of these things that we have to balance that says, here's the risk. This is how we can lay the risk off, and yet still be protected. So some guys for instance, have done, I've been looking at the, at, at, at selling all their cash and coming into buying like a 1240 $13 vertical call spread just to protect it in case the market goes up, that PLC payment. So all of those things, it's, it's not a simple process. It's not something that I can write out as a book and say, here's step one, step two, step three. It is a 3d picture that is on my screens. I've got eight screens in front of me. I'm looking at a 3d picture of what the market looks like, what the risk is at any point in time, and then saying, Hey it's time to lay off the risk or, and, and move and move it forward.
Rodney: Dennis you've said the words acceptable risk a few times during this conversation, when you say acceptable risk, I assume you're talking long features exposure. Is that always what you're talking about?
Dennis: Yes, because I don't, I don't have speculators in my service. I don't have speculators in any of my trading accounts, so everybody is going to handle it, whether they're in a, we do, we do a lot of natural gas for some people. We do a lot of, we do some, somewhere we just sold out a hogs yesterday. So we do some of that, but it's, it's one of those things where we do cover risk for those, those people. So for almost every case, it's an acceptable risk to their position. So if you got guys who are using pivot systems for, you know, on, for corn and their natural gas buyers, then we will, we obviously then it's the other way around. But if they're they're producers of the product, then we're, we're basically trying to alleviate that long risk
Rodney: Dennis, you know, working directly with farmers as you have in the past. And, you know, with this upcoming managed pricing program through Indigo, what kind of strategies have you started using more and more that you've seen some success within the last 40 years?
Dennis: Well, I think, I think the, the best success is, is to, first of all, realize that I don't know as much as sometimes people think, I know I'm looking at a technical indicator that is mathematically based, that doesn't have the foresight of knowing why it is doing what it's doing. And I realized that I'm not always right. I don't want to come across ever as that. I'm always right, because that's not the, that's not the, the, the idea as far as direction goes at the same point in time, I would tell you that I am always right from a standpoint that I tell people, these are the odds. It favors this, but the market may continue. So let's work from a standpoint of that. We may be wrong and let's try to protect ourselves. And I think over the last 20 years, that has been the thing that I have really grabbed a hold of, even in my own operation when we were farming is that I looked at the market from a standpoint of, I could be wrong on this.
Let me protect myself. But at the same point, point in time, realize that the market's market and it can do what it wants to do. And especially in the rice market, a lot of times the market will move and I'll get these calls. Why is the market doing this? And I, again, it's, it's technical in nature. That's all I can. That's the only response I can have. But because the systems that we use are what I would call. They're not fast systems. You know, Rodney, they're not, they're not going to be making signals like today, sell it tomorrow, buy it, sell it the next day. That's not going to happen. This has got to be one of those things to say, Hey, that in general, this is our risk and we probably need to move it. And that's why we'll be, we'll be selling in increments. We're not going to be out there saying, Hey, let's sell everything because we know this is the top on. Not about to, to, to, to say, I'm that smart. I'm not that good. And neither are, I don't know of anybody. That's that good? So we will just continue to use. And what I have done over the years is, is come up with a system that says, Hey, the risk is here. The odds favor, this. Here's how we're going to protect ourselves. And if we're wrong, here's how we're going to, to benefit from that.
Rodney: Dennis, you seemed like the kind of guy that might also be willing to share some strategies that haven't worked in the past or some things that have tripped you up. Any, any lessons learned that you could share with us?
Dennis: Yeah. I think one of the things that can happen is you get a trading system and you're, you're, you're using it. And then you begin to believe it is, is, it is just, I mean, like in the beans, the beans were telling me two to three days ago, sell it, sell it. And I'm like, yes, I know that's what it's saying. But at the same point in time, I don't have the reason to. And I think that the biggest mistakes that I have made is jumping ahead of the system. I'm so sure that this system is going to do this, that I jump ahead of it. And I really, really tried to learn from that. As I tell people, if in fact last Wednesday, I think it was, or Thursday, just before the report I was thinking about, I talked to somebody called me and said, Hey, are you thinking about selling beans here?
And I'm like, well, I thought about it. But then I went outside and slammed my hand in the car door to that feeling went away because it's one of those things where you just have to say, I've got to let the system work. I believe in the system, I believe with everything that we're doing, we're not always going to be correct. We're not always going to have the best price. You know, we're not always going to catch the high. That's not my objective, but at the same point in time, I'm not going to jump ahead of the system. And I think that's the big lesson that I've learned over the last 20 years.
Gabe: And to make a parallel, I think for people that listen to the podcast is given and I talk a lot about writing down that plan, getting that plan down on paper, telling somebody what that plan is. And that's what you're saying, right. Stick to that plan, whatever that plan was ahead of time.
Dennis: Yeah, absolutely. And that's the beauty of technical trading is that the plan can change. How many times have you been called and asked? What, what price do you want to sell it at? And I'm asked that all the time, what price do you want to sell rice at? Well, I'm a technician. I'm going to wait for the system and say, Hey, guess what? You should sell it right here at this price. And that's a, that's what I tell people is, I don't know, I don't have a price. I have a target from a chart, for instance, in corn, we've got it. We've got a gap, 374. Everybody knows the gaps there. Everybody knows that's the target we might get there. We may not, but I watch an, a technical indicator and the technical indicator, if it starts to roll over and say, guess what this trend is done. And we start to see that in the soybeans. Then you bet you that's the price. I'm going to be on the sell side with
Gabe: One, I guess another kind of thematic question aligned with what's worked, what hasn't, but you know, COVID is a completely different environment that we've seen before? Would it be fair to say that kind of the methods you're using, you're still applying those same methods and COVID is an asset there, or, or you find that your habit you've had to evolve what you're, what you're using or how you're using it.
Dennis: No, when you have, when you have an event like COVID or the derecho situation, and you put an asterisk on the chart, there are conditions in technical trading that we consider balanced. And what happens is the market is responding to something that was not known. And you allow the technicals to go ahead and do what they're going to do, and then you allow them to balance. And once they're rebalanced, then I can come back in and reassert the technicals and say, Hey, this is what I'm going to do. It's you're, you're flying blind there for a little bit. And that's one of the things that happens really quite regularly, the last two or three years, you'll have something like this happen. And all of a sudden, you know, the technicals are out of balance and you know, that they're not working because you have, have, have fences that they've crossed. And so you wait until they get balanced and then you can start to feel like you can, you can trust them again. But with COVID once that started and the market refused to rally, and then we realized what was going on with the ethanol. Yeah. The market never didn't didn't balance until it started to hit those low levels down around the three 25 level.
Rodney: So, you know, I guess I, I'm not that familiar with how much of a guy's production you're usually managing, but I'm thinking about, you know, my family farm, we try to diversify our sales a number of ways and mostly through just the timing of those sales. But I'm curious how much of your family farm operation would you turn over to a strictly technical trading platform, like asked another way? Would you be comfortable pricing a hundred percent of a farmers production using your strategies?
Dennis: Absolutely. Yeah. I'm a technician. I absolutely, this is, I mean, I've, I've been following these systems for years and I may know more about the systems and what the actual, a guy who does, who invented them are in some of these cases we follow. So what we do right is we have seven different systems that stack on each other. And so one becomes a filter of another one. And when you get a situation where you've got a filter, that's saying, Hey, this is this condition, but you've got another system saying this is a condition. Then you have to start looking at it, looking at it in more depth, drill down into it to find out why there's the, why there's a disconnect in the rice market. For instance, we just recently had a system that was saying, we were going to get what we call a contractive top.
And that contrast of top, we, while we had one system saying that we had other systems saying, no, it looks like we're going to go up and at least test the recent high. And they were both extremely strong in their, in their, in their direction. I didn't know which one was going to end up being correct. It was the contractive, but I didn't know which one. So sometimes those technical indicators will offset each other and say, Hey, this w it's not clear, but when they start lining up, when they become, when they start to become pretty clear that, Hey, this is where the odds really favor. Then that's when we really make the move. And so, yes, I feel very comfortable and I have, for years, I know the fundamentals, but it really comes back down for me to the technicals.
Gabe: Just out of curiosity, you know, obviously last year was also a pretty anomalous year for, for different reasons. How did the systems perform then
Dennis: Yeah, we sold corn at four 50 heavily on the way up. And that was because we had a system actually after the top, I think was made in the around four 63 or four, something like 66. I don't have it in front of me, but we, we, we came out very strong while everybody's saying $5 corn. Our technicals were saying, well, we may go to $5, but we're probably going to go down to four 21st. So with our position in Texas, where we have that early corn, we went out and we sold heavily at four 50. We had guys up in the central, in Nebraska and Kansas, they all came in and did option strategies at that level. And then of course, that ended up being the, the hot and the top of the market. And somebody would say, how'd, you know, that was the top.
And I, my answer is, I didn't know it was the top. I didn't even think that was going to be the top. I've kind of agreed with everybody, Hey, we're going higher. But when those computer systems start saying, you know what, we've seen this before and before, when this has happened, this has happened. Then we start, we start following. And that's what we're getting right now in the beans, the same situation where the market is in a position where we've seen this before we know about all the bullish news out there, that's all in there. We understand all of that. But the computer systems are saying, Hey, there's this elevated risk here. It's unacceptable. Makes sense to maybe lay some of that risk off. And that's, that's again, how we're going to follow it. Rice market would be the same thing by the way.
Gabe: Yeah. Sorry if I missed it, but your model, it spit out like a binary yes. Sell or, or no don't sell, or is it like a comfort level with the position?
Dennis: That's a really good question. And the answer is it depends on which system, but what we get as a, as a system, that's saying you have elevated risk. And once we start to see that elevated risk, again, we start looking for the trading action that would confirm that elevated risk.
Gabe: Dennis, I think, I think we're gonna wind it up here. Is there any final points you want to make sure you get across to anybody who's listening?
Dennis: No, I, I think, I think the idea would be to make sure you don't make sure you realize this is, this is a long-term game. This is not a short term thing. This is something that it's, it's not a sprint, it's a marathon and a lot of things can change. So we have to be careful that we don't get so sure of things that we end up dumping a massive amount of our crop at the wrong time. So I would say that's the main thing. And that's how we, of course approach marketing from a standpoint of, we know that there's going to be cycles, there's going to be ups. There's going to be downs. And we're going to look for the areas where we see the risk and lay it off. And when there's no risk, we may actually alleviate some of that, that hedge.
For instance, when, when Mark was down at three 20 in a corn, we were telling people, you know, that had the hedges on, you know, this, the, the risk to the downside here is totally acceptable. And so some of the people just took them off, you know, and that was before the duration occurred. Did I, obviously I didn't know derecho was coming, but again, the system said, Hey, this is, this is the situation at risk. And so that's the only thing I would tell people is, think of it from a risk standpoint. And when you know that there are some risks there, you know, take steps to, to protect yourself and realize it's a marathon, not a, not a sprint.
Gabe: So Dennis, thanks again for the time today as expected. I know I learned a lot. Rodney looks a little glassy-eyed so he's probably rolling, rolling in some new knowledge as well. I want to thank everybody for tuning in listening to Dennis on Grainwaves waves here. And as a reminder, it's podcasts offering real time analysis of the grain markets. If you're new, please remember to subscribe and leave a five-star rating and share with your friends and family.