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Watch those spreads

Agriculture.com Staff 10/23/2009 @ 12:44pm

My theory about the grain markets not selling off after the nice weather last weekend proved to be more correct than I thought. Here in Cass County, we had three days of harvest. Sunday was really good. Monday beans were a little tough but harvest went well. Tuesday was damp but thanks to modern machinery we were able to get over quite a few acres in the few hours we had. We got all of the seed beans in the bin, for which I am thankful. It is tough to see that valuable crop stand in the kind of weather we have had since Wednesday.

The rain yesterday and last night was enough to keep us out of the field for at least a couple of days. The farmer I harvest with is now talking about doing some corn until there are enough days for the bean fields to dry. That is probably a good idea.

In response to last week's column about the dead cat bounce, there have been enough days' rally off the harvest low on October 5 to complete the typical bounce. With this week's price action, the rally has obviously been big enough to complete the bounce. Now the difficult part is deciding when to pull the trigger on sales. My situation is that I am 40 percent sold in the futures market. With no beans harvested yet, I am not about to make cash sales until I see the beans in the truck. I am not sure what to do with the hedged portion of the crop. I still have about a week to decide before I need to roll out of the hedges into a later month or make a cash sale.

Something to watch in this situation is the spread between nearby futures and deferred futures. The normal situation is for the deferred futures to be higher than nearby, reflecting the cost of storage. Soybean futures have been almost even for several months. That is a bullish situation. The market is telling us to sell now, not store. In the last few days the inverse has gotten wider. As of yesterday's close, November futures were nine cents over July. You could sell November futures and buy July futures at a discount. This is a very unusual situation where selling cash and buying futures is a strategy with high odds of success.

The spread in corn futures is still positive, but getting smaller daily. I look for a spread of 30 cents or more to roll December hedges to July futures. Early this fall that kind of spread was possible. As of Thursday's close, the spread was 25 cents. This price action is telling us that the corn market is getting more bullish as well. If corn prices continue higher my strategy will be to liquidate both the December futures and the December $4.00 long call option, take my profit and store the corn for delivery next spring.

Right now it is difficult to think about anything but getting the harvest in the bin. I need only three good days to finish up soybeans. We have had six good days in the last three weeks. However, the later it gets, the lower the probability of the weather being warm enough to dry the crops. Weather has a way of averaging out over time. I am looking forward to a warm and dry November!

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Soybeans Rally on Demand, Weather