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Sell on rally!
Grain price seasonal patterns and monthly trends provide endless opportunities in cash grain marketing. Each day, I get a call that asks the question, “When is the best time to sell my grain?” I answer, “There are too many to list!”
Traders and sellers of grain who exercise basic patience and money-management skills are the most rewarded in the industry. Too often, we see the unprofitable trading patterns of those who use emotions for their trading and marketing practices.
The world of grain continues in a situation of a tight supply/demand balance. Fundamentals suggest price swings certainly will continue to be extreme.
When the market price of grain is rallying, people become confident and develop a false sense of security with profits. Farmers – especially – become fearful that if they sell now, they will cheat themselves out of more profits. The natural emotion of greed keeps us from more practical and eventually profitable practices of hedge management.
These billion-dollar index and trend-following funds (which don't know a bushel of corn from a phone booth) that have 90% of their trading decisions derived from chart patterns, see the market merely as a profit-taking business.
Funds buy the breaks and use their massive financial clout to make the price movement, which, more often than not, is a greater swing than underlying fundamentals of supply and demand would suggest. The big funds make the profit, then they take the profit. When they buy, they also immediately look for their exit point.
“If you don't take your profit, the market will.”
Income for managers of the primary funds comes from bonuses paid on profits taken before the month's end. This makes taking profits or selling the rally an easy decision. Since these massive funds control all the large price swings, you have to use the same trading psychology and management principles.
Here are the two best trading principles I've learned from these large fund managers:
● It's a profit-taking business.
● If you don't take your profit, the market will.
Which means, rallies don't last forever. Someone is going to take a profit!
The volume of trading is large, and traders make considerable money on the near-term weekly and monthly moves. Small traders need to remind themselves that when they make $1,000, someone else has made a million. This volume sets up regular monthly patterns of rallies to lock in. The same goes for seasonal patterns.
Let's address the yearly seasonal. Producers who can store grain have received huge rewards. In 2008, when index and trend-following funds and their massive dollars entered the scene, they created what was to be the beginning of our large yearly price swings. Corn went from a January low of $4.75 to a June high of $8 on the December futures. That was a $3.25 rally. The 2009 low occurred in February and increased $1.50 to the high in June.
The 2010 low was almost a six-month low, with a trading range from January to June 1 of not higher than $4.20 nor lower than $3.70. It was a 50¢ up-and-down trading range before a sudden drop at the end of June to $3.44. That was followed by a July-to-November rally to $6.08, or a $2.64 rally on the December futures contract.
In 2011, a split rally occurred with a January low of $6.10 and a June high of $7.99. July futures rallied $1.89. Then the market broke to $6.38 by the end of July. With July futures then in deliveries, December futures took over on the break at $5.76. A weather-related rally in July pushed prices all the way back to $7.80 in August for a $2.04 rally.
Assessing the past 4 years
Three of the past four years saw price lows in January and February. Only 2010 saw a low come in June. But in all practicality, the June low was only 26¢ under the lows seen almost monthly the five prior months. The trading range those months was a tight 50¢ prior to the big rally into summer and early fall.
One reason for the early year low is that funds are not as active in trading as they are during the bullish issues of the year prior. January into February is when funds seem to clean out their remaining long positions from the old-crop year fundamentals before rebuilding their new-crop year buying position ahead of anticipated spring-summer highs. Those rallies are based on the fear and uncertainties that every planting and growing season seems to bring.
The process begins each year ahead of the March 31 Planted Acreage Report. Focus is on corn, beans, and wheat needing to trade high enough to each other so as not to lose acres, as growers choose the most profitable crop and acres to plant.
With world demand expanding and ending stocks on the decline, this creates a need for more corn and bean acres over the year prior. Then the talk swings to early spring planting concerns and possible acreage shifts.
Growing season uncertainties bring talk of too hot here and not enough rain over there. Funds look to trade fear before fact and load up. In 2008 and 2009, the seasonal rally peaked in June. In 2010 and 2011, the market kept going, driven by weather concerns. In 2010, late crop-season rains and flooding cut corn and bean yields, while 2011 saw the fourth hottest and driest July on record in the Midwest.
The seasonal profit potential and timing are clear for the funds. For many farmers, however, selling decisions begin when their crop is binned and bushels are known.
Prices rallied $4.70 from a harvest low in 2007 to the high in 2008. The harvest low rally from 2008 to 2009 was $1.18. From 2009 to 2010, it was $2.99; from 2010 to 2011, it was $3.49.
Long-term yearly patterns show that avoiding sales at harvest is nearly always the best strategy. Storing cash grain into the late spring-summer season is nearly always rewarded.
Monthly patterns also offer opportunities for farmers who like to sell a stored crop a little at a time as price warrants. Here's why. Funds buy long at the beginning of the month and before the release and uncertainty of each USDA monthly crop report that comes out the ninth through the eleventh of each month. Then the funds take the profit made if the markets move higher.
The prereport rally has been consistent since 2008, as world demand from emerging markets makes it difficult to keep up with production. Each and every monthly report is feared to show more usage and lower ending stocks.
In 2009, in eight of 12 months, the futures price rally and high occurred before the second week of the month and low the second half of the month. In 2010, the pattern occurred in 10 of 12 months. In 2011, seven of the first nine months have had a measurable prereport rally.
Though cash prices don't always keep pace with a more emotional futures movement, hedgers can use the futures like it's the cash price. Profit is profit!