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Roy Smith: Horse trading?

11/12/2010 @ 10:37am

The soybean market, in recent weeks, reminds me of the story of two farmers trading an old, worn-out horse back and forth. Each time the horse changed hands the price got higher. Finally an outsider came to the farm and bought the horse for a million dollars. The farmer who had initially bought the horse for ten dollars was furious at his neighbor for ending the game. The first farmer wisely observed that one day soon the horse was going to die and both farmers would be out of the horse trading business. 

After this week’s action, I wonder if the horse died over night in the soybean market. Reaction to this week’s government report was decidedly bullish with cash soybeans in Eastern Nebraska up 54 cents on Tuesday. As recently as Thursday’s close, cash soybeans were 22 cents higher at the same location.  With the cash price at $12.62, it made my latest sale at $11.87 look pretty bad. 

All commodities, at some point, reach the horse trading price level where customers cannot afford to use the product. In earlier years, I used the 1980 silver market, which reached $40 per ounce, as my example of the commodity horse dying. More recently I have used the soybean futures price in 2008 of $16 per bushel and the corn futures price at over $7, as examples of unreaistic price levels. With today’s fundamental situation I do not know how high is too high. 

My experience with the 'dead cat bounce' over the years is that prices do not fall out of bed after the peak has been reached. The market normally gives farmers the second, third and even fourth chance to make sales at very good levels. Like everything else in marketing, it does not have to follow the normal pattern in any given year. This could be the year when the price really does fall precipitously when the horse dies. 

If you did not get enough soybeans and corn sold at recent highs, decision time is here. Even if the market is limit down today, the cash bid will probably be higher than my last sale. However, with prices going up more than $1.50 a bushel in less than two weeks, you have to realize that it can move the other way just as fast. I have been around long enough to remember the first week of December, 1980 when soybean futures were limit down seven consecutive days.  I am not predicting that this time around. I am simply saying that it could happen. 

On the positive side, the basis in eastern Nebraska for cash soybeans has improved 23 cents in the last four weeks. This indicates that the demand for beans improved. Even in 1980, there was a triple top before prices headed into the tank for good. Be ready to make decisions quickly if you need to sell cash beans and corn. Do not own the horse when it dies!

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