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Develop your seasonal strategy
Some of my readers call me an analyst. Others have less complimentary words to describe what I do. I personally prefer to be called a strategist. Supply and demand numbers confuse me. More often than not, they are referred to as “projected” supply and demand. Guessing what the future will bring in other words!
I study price patterns over several years and figure out what the market is likely to do at certain times. Most of the time these strategies come with a probability of the market going in the direction I anticipate. The terms “always” and “never” are seldom used in marketing. Charts that I use to develop strategies can be found on my website, www.soyroy.com.
Some strategies are based solely on calendar dates. An example of this is the strategy of never selling soybeans during the month of February. The only instance of this strategy failing was last year, 2011. That is the only example of the yearly high being in February. Chalk that up as a 95% probability strategy!
Some strategies take into account both time and price. My famous “dead cat bounce” strategy falls into this category. In the last 20 years this approach has produced a profitable sale every time. I do not classify that as an “always” event because it requires a certain amount of judgment in deciding when to pull the trigger on sales.
The strategy of selling soybeans the day before the September crop report is based solely the calendar date in relation to the release of the report. For some reason the report tends to be a bearish surprise shortly before harvest. This situation results in the price of soybeans dropping about 80 percent of the time between the September crop report and the beginning of harvest.
Last week there were several analysts pointing out the frequency of limit moves in the corn market after the January report. I remember clearly the limit move in the corn futures market after the report on January 12, 2010. That bearish report set the tone for most of the following year. A similar thing happened after the report was released last week. Maybe there was some validity to the prediction of limit moves after that report every January!
A quick look at the 20 year charts did not disclose any evidence of a sharp drop in prices in early January. However, looking at price action in individual years told a different story. My quick and superficial study of charts from 2002 through 2011 showed five years when prices dropped, four years when prices went up and one year of almost flat prices. It appears that these moves have a tendency to be large in relation to the price level at the time. My bar charts of individual years are not detailed enough to allow me to look at daily prices to study them accurately.
My study shows that the warning that the January report generates limit moves is valid. The problem is that the move is almost as likely to be up as to be down. This makes it tough to devise a strategy to protect the value of your grain inventory. One possible approach is to have some sales made before the report but have some grain that is unpriced. That is one way to be sure that you do not have the boat loaded the wrong way.
It should be theoretically possible to buy both puts and calls prior to the report. The strategy then is to sell the one that is losing money after you know what the report says, but keep the one that is gaining value. The option that is losing value should move less than the one that will then be in-the-money. I used the term “theoretically possible” to describe this strategy because getting positive results may be limited by the liquidity in the options market. Implementing the transactions will require a lot of patience.
I am not ready to call selling corn the day before the January crop report as one of my recommended strategies. I do think that the moves are big enough and the financial stakes high enough to warrant further study. I may find out that there are clues that indicate when prices will drop after the report so that appropriate action can be taken.