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What is going on?

Agriculture.com Staff 02/10/2006 @ 10:25am

One of the marketing principles I discuss in my marketing workshops is "The function of the markets in February is to make farmers depressed." It is based on the idea that a major low in corn and soybean prices is very common during the second month of the year. This is the move I call the "John Deere Low" which I have discussed here numerous times.

This year something entirely different seems to be going on. I say "seems to be" because the month is not over yet. Both grains have been making some impressive price gains during the early part of February. This is impressive considering the huge production in 2005 and anticipated large carryovers at the end of the marketing year.

Corn futures made new post-harvest highs this week. Soybean futures had their highest post-harvest price on January 4. This weeks high was somewhat less than the January 4 high, but still pretty impressive considering the size of the supply.

Action the last two weeks has me thinking that the "John Deere Low" might have been on January 18. That is earlier than normal but within the price range of earlier John Deere Lows. It seemed to me that the psychology of the market turned following that low day.

Positive price action following the negative report on Thursday leaves me even more confident that the markets could go higher. The nagging feeling still persists that the market is violating the logic of the fundamentals. There are three possible explanations for why this is happening. The first is that the fundamentals are not what they seem. There is always the possibility that there is some unseen demand that farmers do not understand that is causing prices to rise. The wide basis that exists now would indicate that the actual demand is not all that good.

The second factor is that there could be a major change in psychology going on that will support prices at a higher level long term that we are accustomed to. Such a transition took place in the early 1970's when corn prices broke $2, soybeans broke $4 and never went back. Such transitions normally occur only once in a lifetime. However, given the high energy prices maybe it is happening now.

The third possibility is that the higher prices are only temporary and will adjust themselves downward when new supplies come on the market or demand turns out to be less than anticipated. This seems to me the most logical explanation. If this is the true scenario, timing sales will be tricky and very important to 2006 profits.

The current rally is having several effects on marketing opportunities. It is causing margin call headaches for those of us who "sold the carry" on 2005 corn. The continued big carry between March and July corn futures makes early termination of those strategies impractical. However, it does offer an excellent opportunity for those who took a big LDP, holding corn unpriced to get that grain moved.

It also makes for forward pricing opportunities. I normally do not believe in selling either corn or soybeans in February because of the reliability of a major low during that month. However, in the “Winning the Game” workshops our guidelines say new crop corn sales have a high probability of success when December futures are over $2.40. Selling new crop soybeans when November futures are over $6.00 is also a very reliable approach. Current prices exceed both of those levels.

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