Roy Smith: Torn between a good price and a better one
I sold some cash soybeans last week. To be technically honest, I lifted the hedges I had placed early in the year and at the same time priced the 40% of my 2010 crop that the hedges covered. Because of the unexpected worsening of the basis early this month, I did not achieve the net price of $9.00 I expected, when the hedges were put on in the spring. However, with delivery on November futures looming and commercial storage soon to begin on the crop already in the elevator, I felt it was time to stop margin calls and convert the positions into money. My spec position went long on October 5, so I am gaining back some of the poorer returns by owning January futures and on the portion of the crop not yet priced.
Following the charts of the dead cat bounce gives me some idea of when to sell more cash beans. The rally reached the necessary 15 trading day's high vs. the harvest low on Tuesday of this week. Under the guidelines I use for tracking the bounce, sales can now be made at any time. The sale last week coincided with the cash price of $11 here in eastern Nebraska. In the summer of 2008 when soybean prices got very high, I began making new crop sales at $11. It proved to be a very wise move. There are some factors that make me think that the rally could continue.
I watch the basis for an indication of price direction. At my local elevator, the basis started weakening the last week of September just as harvest was starting. It took a severe drop after the October crop report as the futures prices were sharply higher. Last week, it started to improve. It is still several cents worse than it was before the crop report. However, strengthening the basis is an indicator that the demand for cash soybeans is improving. That indicates that there is still room for the price to rally.
The long term seasonal price charts show the top of the dead cat bounce being on November 5. That does not necessarily mean that the price will go up next week. What it does show is that, more often than not, the bounce is longer than the 15 trading days mentioned earlier. Cash soybean prices do not normally fall out of bed when the bounce is over. In many years the bounce lasted into December.
In planning to make more soybean sales, I am torn between a very good price today that will generate very good cash flow and the good possibility of the price being still higher next week. I have two possible strategies to help me decide when pull the trigger. The first is my old tried and true approach to sell in increments. Since I already have the 40% sold mentioned earlier, selling another 20% makes a lot of sense.
Another approach is to sell when the landlady on my rental farm sells her share. That person is my wife. I have found over many years of farming that selling when my wife sells seldom turns out badly. She understands and has experience with the dead cat bounce. More importantly, she does not get emotionally attached to the crop. It does not bother her to miss the top by selling too soon. The alternative is holding too long and paying too much commercial storage. Her instincts are generally very good!