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Psychology Rules!

Agriculture.com Staff 11/09/2007 @ 9:17am

The farmer I work with finished harvest yesterday. What a great end to a very good harvest.

Soybean yields were close to record levels and corn was very good considering that June and July were two of the driest months in history. A week out because of excess rainfall in early October and breakdowns totaling three days were about all of the negatives in an otherwise phenomenal year.

The crop report this morning was slightly positive for soybeans and corn. The important thing will not be the report numbers but the market's reaction to it. There is already a lot of bullishness built into prices. Whether they can go up again today with this positive news probably determines the outlook for the next few weeks.

Gold and crude oil prices are feeding the positive psychology in all of the commodity markets. These in turn are driven to a great extent by the value of the dollar. Watching the prices of these markets is probably better than watching the fundamentals of the grain markets. The Murphy's Law that says "Be right, sit tight" has paid off for those long the corn and soybean futures and farmers holding cash grain unpriced. At some point they will be wrong and prices will turn. If you do not believe that, look at a wheat futures chart. Knowing when that will happen is a big guess.

My seasonal charts are not a big help in the current market environment. At this time of year, the big event in the soybean market is the dead cat bounce. All of the criteria for this move have been met for 2007. Selling anywhere in the current price range will net the seller more than a dollar above the harvest low of October 8. The bounce seldom ends abruptly. Usually there are four or five peaks. The rally seldom lasts past January 1. "Seldom" is a key word because in 2006 and 2003 the bounce turned into a full blown bull market that lasted well into the following year.

The line on the long term seasonal corn chart goes flat from the middle of September to the middle of February. October and November are months when I look for opportunities to roll hedges from December futures to July futures of the following year. If the carry is big enough, there is the opportunity to lock in some very positive returns for storage. This year the possibility for big storage returns exits with the carry at a historic high of 35 cents and abnormally wide basis. This does not forecast what prices will do in the futures, only that you can lock in a price that is considerably better than today.

Cash flow has to be a factor in making decisions at price levels where they are today. When you think about gross returns per acre on the 2007 crop, it is hard to imagine why anyone would store grain unpriced. The reason is that we have all seen prices start at levels that would normally be considered high and go higher. It is tough to get over the psychology that you sold something at a price lower than today. Sometimes, you just have to close your eyes and sell !

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