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Roy Smith: Looking for a low

01/28/2011 @ 3:15pm

One of the first things I learned when I began studying the grain markets in the 1980’s was that it was very common to see a major low in the corn and soybean prices in February. At the time, I referred to this event as the “John Deere Low”. The theory was based on an observation that because farmers had major cash flow needs around March 1, grain prices dropped as grain was sold in February. It also led to a rule of mine that soybeans should never be sold on February. 

Grain markets have changed drastically since the 1980’s.  The February low is not nearly as pronounced now as it was back then. In the last five years, seeing soybean prices in an uptrend through February has been common. This would seem to be counter intuitive as the southern hemisphere crop has become a larger part of the world soybean trade. If you look at a chart of the last five years of soybean prices, the uptrend from the harvest low through the month of May is undeniable. 

Even with the changes experienced in recent years, selling in February continues to be an unprofitable strategy. When prices have risen in February, they have continued to rally in the following month.  This indicates that patience is a virtue when marketing grain in the first two months of the year. Waiting to make sales in March or April has been a profitable approach. Some years the payoff has been great and sometimes small. It has consistently been enough to more than pay for the cost of storage. 

It will be interesting to see if the pattern persists in 2011. With cash corn around $6 and cash soybeans around $13 as the month begins, it is difficult to see how they could be lot better in March.  On the other hand, in 2008 when November soybean futures hit $14.50 on March 3, they went on to make a high nearly $2 higher on July 1. When prices are as high as they are at a time of traditionally flat markets, I do not rule out the possibility of higher prices later on. I do not try to discourage anyone from making some sales at today’s levels. Greed can sometimes lead to over staying the market when  prices are at exceptionally good profit levels. Price action in next month will be fun to watch!

             

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