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Look out below

Agriculture.com Staff 03/10/2008 @ 10:22am

It seems unlikely that a big washout in commodity prices will occur any time soon, but history would tell you otherwise.

The grain markets have had a significant and prolonged uptrend since fall, with futures closing higher virtually every week. However, what goes up will probably come down. When prices do drop, it could be harsh.

We often term the bean market as "viciously unforgiving" when it decides to trend down. This week may have provided the market with the first taste of how quickly prices can drop. After reaching a contract high on Tuesday at $14.66, November beans then finished the day posting a bearish key reversal at $13.97-1/2, or nearly 70 cents off its high. Prices rebounded early Wednesday, only to finish weaker. Follow-through selling pushed prices lower on Thursday. Once a market begins to find a direction, the magnitude of the move can be so fast and furious that it is hard to know what to do.

Therefore, we will continue to encourage producers to trickle in sales as long as the market is moving upward. When and if prices peak, the drop could be so rapid that making additional sales could be difficult. All the way up, you may second guess why you are making sales. Yet, when the market drops, you feel vindicated. Actually, it is just a matter of simple economics. Bull markets continue to move upward as people buy additional contracts. Once the buying interest wanes and the market begins to drop, most everybody heads for the sidelines at the same time, thus accentuating the liquidation phase which creates a rapid price drop.

Those who have made few or no sales have proven to be the greatest of all risk takers this year and, as of this writing, it has paid. However, if and when prices drop, they will have to make significantly large sales in a hurry in order to capture that benefit. Otherwise, they eventually will be averaging down their selling price. It is likely that their average selling price will be no better than those who sold when prices were on their way up.

If you have questions or comments, contact Bryan Doherty at Top Farmer at 1-800-TOP-FARM ext. 129.

It seems unlikely that a big washout in commodity prices will occur any time soon, but history would tell you otherwise.

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