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A little early, but not unusual

Agriculture.com Staff 10/06/2006 @ 9:11am

My conjecture two weeks ago that the harvest low in soybean prices might have been in September appears to have been on target. Action the last two days certainly looks like the proverbial 'Dead Cat Bounce'.

The conclusion is not certain yet because all of the criteria have not been met. One criterion is a move higher of at least three weeks or 15 trading days. If the low was on September 12, yesterday's close was 17 trading days later.

The normal rally is at least 35 cents in the cash market. The low on September 12 was $4.69 at my local elevator. Thursday's close was $5.01. The 32 cent price improvement is three cents short of the minimum. Basis improvement drives a major portion of the move in the cash market. It is common for this to be 20 to 40 cents. Yesterday's price rally at my local elevator was partially a result of five cents basis improvement. It is a relief to finally see the gap between futures and basis narrowing. This situation usually means that there is enough demand that prices can continue to rally.

Many analysts assumed that the huge projected carry over would mean that soybean prices would drop as harvest began. They also thought that ideal August weather would mean a big increase in bushels of soybeans produced. Both of these conditions could still happen. However, it will only take three more cents of rally to meet the minimum criteria for a normal bounce.

It is not unusual to see a big rally in the face of a huge harvest. In 1997, there was a major low in soybean prices just as harvest began the first of October. The following eight days prices went up a dollar a bushel. It did not qualify as a complete 'Dead Cat Bounce' because the duration was too short. After nearly a month of consolidation, a second peak was made a dime higher.

The next year, 1998, saw a similar move. It started lower and lasted only six days. It was good for 40 cents initially, with another 20 cents after consolidation. In both of these instances, selling on the bounce was better than any sale made for the following six months.

Nothing in marketing is certain. The move going on right now is surprising a lot of people. From all appearances, most of it is psychological. Whether fundamentals exist to keep the rally going is irrelevant short term. If it continues for the next few days, it is a wonderful opportunity to sell cash beans. The one factor to remember is that over the last 27 years, very rarely has the 'Dead Cat Bounce' been more than a dollar a bushel. With the kind of action seen this week, that price could come very quickly, as it did in 1997.

My conjecture two weeks ago that the harvest low in soybean prices might have been in September appears to have been on target. Action the last two days certainly looks like the proverbial 'Dead Cat Bounce'.

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