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A sure market signal? -Roy Smith
Today is the last trading day of July. Many years of watching markets leads me to the conclusion that not much good happens in August. In many years, the soybean market puts in a minor low the last week of July or the first half of August. This results from prices getting oversold during July. This leaves the market vulnerable to sharp rallies as weather problems develop during pod fill. That sell off did not happen this year.
The corn market follows a different pattern. That is probably because the critical pollination time is past, in most areas. Only about one year out of ten is the yearly high in August. The occasion is unusual enough that I never hold grain in storage hoping to hit that rare price peak.
In my years of studying markets, I have observed occasional price responses that give an indication of future price direction. One of these price actions takes place during the summer. It is especially observable in July and August when there is a good chance of weather problems causing price volatility.
The biggest weather factor in market movement is normally drought. Late planting can occasionally rally markets as it did this year in the Eastern Corn belt. Fears of early frost may cause price excitement. Seldom does an early frost do enough damage to have lasting effect.
Prolonged hot and dry conditions bring about at least a small rally almost every year. Sometimes the situation turns into an extended bull market. I have long held the theory that the closer the problem is to Chicago the earlier the drought rally starts. If it is dry in Nebraska or Kansas few traders take notice. If it is dry in northern Illinois, the rally may begins before any damage occurs.
This year, it seems as if the situation is almost opposite what is normally expected. Rain in Chicago usually causes prices to drop. Many times prices drop before the rain begins. I have seen prices crash on Friday but the rain did not start until Sunday night. This week there was general rain in Chicago and over most of Illinois. Instead of crashing, prices held in the area they have traded in recently. At least that was true until today (July 29).
Until today, this is a very positive sign. Now I am not so sure! When prices can hold together in the face of negative news it can be an indication that the future price direction will be higher. I am especially encouraged by the very strong basis, 16 cents over September futures here in southeast Nebraska. Price action next week will be critical for judging whether my theory of rain in Chicago is a trend or just a marketing fluke.
Normally by August 1, I have all of my old crop grain sold and delivered. I usually have price protection on 40 to 60 percent of new crop. I finished hauling and selling the last ten percent of the 2010 corn this week. My 2010 soybeans have been gone since January 1. I have 40 percent of my new crop soybeans covered with January futures. Those sales look good after today’s price action. I have no positions in 2011 corn. I have storage for 100 percent of my anticipated corn crop. This gives me time to wait for new crop bids in both futures and basis to catch up with old crop. I may hedge the stored corn following harvest, if there is sufficient carry and if it appears that there is potential for a big basis gain. Time will tell.