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Roy Smith: Drop dead dates
My field of expertise in the soybean and corn markets is in studying seasonal price patterns. For the most part this consists of looking at historic grain prices and trying to find a pattern that repeats often enough that the dates can be used as a marketing plan tool. I watch both the futures and cash grain prices. No pattern repeats reliably enough that a marketer can be 100 percent sure of results.
A permutation of this strategy is what I call “Drop Dead Dates”. Some of my friends tell me that I have an obsession with dead animals considering that the “Dead Cat Bounce” is also a strategy in my marketing tool box. I choose these catchy names so that farmers who attend my workshops will remember the principles and theory behind these seasonal moves.
A drop dead date is a date beyond which I do not want to hold unpriced grain in inventory. It differs from seasonal selling dates in that the seasonal selling dates usually represent only one of several good times for making sales. If one of the seasonal dates is missed or turns out to be not so good in a particular year, there will be another selling opportunity later.
The drop dead dates could be considered a line in the sand or a last chance to avoid getting stuck with grain and then being forced to sell at distressed prices. Besides futures price outlook, the drop dead dates might factor in basis patterns, storage availability, cash flow needs, risk tolerance and other things that a farmer would consider before pulling the trigger on pricing.
For instance, because I do not have storage for soybeans, I evaluate whether the potential price increase on soybeans in commercial storage is enough to offset the cost of storage before the next seasonal sale date. In the case of selling soybeans on the dead cat bounce, I also consider how far the price has rallied since the last major low. In most years my drop dead date for soybeans is December 31.
Last year, the drop dead date of December 31 worked especially well for the 2009 crop. As prices rallied off the harvest low, I sold beans in increments. By the holidays I had only 20 percent of the crop left. I missed my target date by one trading day, finally selling on January 4, the first market day of the New Year. The sale price was $10.07. You could look back and say that the price is higher today. That is true, but it took until August before the cash price was back to that level. By that time ten months of storage and interest had accumulated. The net price, less storage, would have been much less. In addition, if the beans would have been stored on the farm, they would have probably been moved before that to empty the bin for the coming crop, since the odds of a yearly high coming in August are very slim.
This year, as in most years, my drop dead date for soybeans is December 31. With the cash price now $2.95 over the October harvest low, the scenario is set up for the drop dead date to be a very good sale. Can the price go higher? Anything is possible. Today’s price is still below the high of July 2008. However, when the market rallies nearly $3 a bushel in the face of a large crop, it is hard to argue against making a sale.
My date for corn is normally July 1. Unless there is a drought, the market usually starts focusing on new crop supplies becoming available by harvest time and prices drop. I have adequate bin space to hold my crop, so storage costs are limited to a small amount of electricity to keep the grain in condition and opportunity cost on the value of the grain. With the cash price of corn over $5.50 per bushel I do not plan to have much 2010 crop to sell on next summer’s drop dead date!