The weekend of the Independence Day holiday is a time of great uncertainty in grain markets. The government crop report is out of the way with no big surprises. Traders can now focus on other things. After the sharp sell off of the previous weeks, the concern now is weather.
When I write these weekly columns, I look back to columns from previous years. The comments I made in 1999 still apply to the current situation. An excerpt follows:
"BEWARE of the July 4 syndrome! The holiday weekend is frequently a time when prices turn. Sometimes they turn higher and sometimes they turn lower. Independence Day marked a minor low in prices in 1991, 1995 and 1996. In 1997, a rally began that culminated at harvest. November soybean futures went from $5.80 to $7.40. In 1990, prices turned down when traders returned from the long weekend to discover that there had been rain over much of the Corn Belt. In 1992, the summer high was on June 29. A gradual downtrend started that accelerated when prices dropped 16 cents the day following the long weekend.
"A new crop sale made around the July 4 weekend may be either very good or very bad. In 1997, prices that week were the worst of the entire year. In five of the last ten years, a major market event has transpired over the Fourth of July weekend. There is no way to predict if it will happen this year. I still hope that there will be a weather rally. In 1996, prospects of a big crop and good weather in June had prices in the tank. Between July 5 and July 12 soybeans rallied a dollar a bushel. Most of it was gone a week later. Within two weeks, prices were lower than before the rally!
"I am not predicting anything of that magnitude this year. We do need to be aware that markets do irrational things. It is especially true in July! Remember that based on the 20 year averages, the highest prices of the year come during the weather rally. We have not seen them yet. I think they are still ahead. I certainly do not guarantee it!"
Those comments are just as valid today as they were in 1999. The most important factor is not what the weather is, but what traders' perceptions are. The scenario is set for exciting things if traders perceive production problems are ahead.
In my newsletter that went out to subscribers today, I said that my bias is that the major weather rally for this year is still ahead. That is strictly a gut feeling because there was a rally that had many of the characteristics of a weather rally the last part of May. Predicting how prices will respond to anticipated, or real, weather problems is something I am not very good at. This is a situation where technical analysis is very useful if you have a system that you are comfortable with.
The latest price drop resulted in option premiums being reduced enough to make protecting sales with call options a viable strategy. That strategy is worth looking at in this time of great uncertainty.