Seasonal triggers add value to marketing plan
I first started studying seasonal price trends in the grain markets thirty years ago.
Often, I was asked by farmers at marketing meetings if there was a danger that the strategies I was proposing would become so commonly known that they would no longer work. My standard reply was that the market is so big and my influence so small that there was no possibility anything I could say or do would move prices. I still believe that to be the case. However, sometimes it seems as if market reaction to a seasonal event is exaggerated. A case in point took place this week.
Most of my readers probably know that I trade a small speculative futures account to test my theories in actual markets with real dollars. I use a long term seasonal price chart to tell me when to be long or short in the futures market. The charts said to change my position from long to short in the soybean market on the 19th trading day of December. This year, that was last Monday. I followed the charts and sold March soybean futures on the close as indicated. The trade was made at $13.08. Soybeans closed the next day at $12.92. There was no trading Wednesday. Thursday the price at the close was $12.70. The net unrealized profit after two days of trading is $.38.
There was similar price action in September, based on the crop report and also the low in October at harvest time. It would seem as if the charts have become self-fulfilling in predicting market direction. Another way to look at it is that the day before a big price move the charts are predicting what will happen and when. I wish it were so simple! Unfortunately, a lot of money has been lost by farmers thinking that there is a magic bullet in grain marketing. A more likely explanation is that a majority of farmers think alike when it comes to making decisions. We all reach the breaking point on the same day.
This theory is illustrated by the dead cat bounce that ended with the wash out this week. The problem began several weeks ago, while prices were still going up. On November 29, the cash basis had been trading at $-.45 for several weeks. The cash bid had been going up for a month. The next day, local buyers dropped their basis by a nickel. In the following weeks, futures continued to rise but the cash price never did get back to the level of November 29. One buyer told me that the crushers were getting plenty of beans to process even with the lower bids.
Reading the basis as an indicator of demand, the bids were telling me and other farmers that the cash offer was unlikely to make any more new highs. Both cash and futures went up and down several times but the basis continued to widen. March futures finally broke through chart support on December 23. The price direction since then has been mostly down. Having two holidays with no trading probably has kept the tumble from the highs from being worse than it was.
It is easy to look at prices and say that the problem took place this week. In reality, there was plenty of warning that the trouble began on December 1. It just took three weeks before the situation manifested itself in the drop from $12.54 to $12.15.
Having seasonal triggers is very helpful in implementing a marketing plan. Nothing ever does away with the emotions of decision making. This week, I was glad that I had established a “drop dead date” to clean out my 2013 crop soybeans. Nothing is perfect. Seasonal triggers work well about 80 percent of the time. Occasionally, there will be several in a row that hit the target. Sometimes there will be one or two that are way off target. In the rare occasion, when that happens, I at least have the satisfaction of knowing that I made the decision based on sound research and did not fall prey to emotional traps that are common in marketing.
All cash prices and basis bids are from Midwest Farmers Coop in Southeast Nebraska.