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It's time for high prices

03/17/2012 @ 11:19am

The cash soybean market has had a nice run since the harvest low last fall. I have had a lot of questions from farmers wondering why soybean prices have gone so high recently. There definitely are some fundamental factors pushing prices to these high levels. Dry weather in the Southern Hemisphere reduced the available supply of soybean coming from that area. Anticipated increases in acres in the United States being planted to corn reduces the potential soybean crop for 2012.

However, my stock answer to the question of why soybean prices are rising now is “It is time”.  Grain prices move in one direction or the other just based on the psychology of the change in seasons. This principle is the foundation of my seasonal price trend studies. Right now the attitude of traders in the soybean market concerns the risk premium in the market. Everything about the soybean supply and demand for soybeans in this country is an unknown.

There are real concerns about worldwide soybean production of both old crop in South America and new crop in the United States. With so much uncertainty, any small change in fundamentals causes a big reaction in price. While the subsequent volatility is causing the price moves to be more extreme than normal, the timing of these moves fits the seasonal pattern very well.  

Charts of average soybean futures prices for the last 30 years shows the trend higher following harvest is broken by a pull back in prices that I once called the “John Deere Low”. In a graph of the last ten years, however, that low has disappeared from the picture. The graph shows a long gradual uptrend from around October 1 through April of the following year. The odds of profiting from storing soybeans into spring have improved as the Southern Hemisphere crop has become a major part of the world market. This is just the opposite of what seems logical.

The next question then becomes when the uptrend will end. Again, the charts show good odds of price strength into June. However, there have been years when the biggest part of the rally is over by the end of March. With soybean prices over $13, there is a lot of downside risk.  This is the point in marketing where evaluating cash flow and setting price targets makes a lot of sense. A logical strategy is to save a few gambling bushels to hold into June. For the remaining bushels dividing into increments and setting price targets is a logical way to trigger sales.

Regardless of what the long term charts show, some day this up trend will end. Whether the break is sooner or later depends almost totally on psychology. To avoid holding too many bushels when the price comes down, set drop dead dates beyond which you will not hold unpriced grain.  The long term charts provide good guidelines for this also. Odds of the rally lasting past the end of July are very slim. Personally I prefer to sell too soon rather than too late no matter how difficult it is to do! 

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