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Tough times in the bean market

11/16/2012 @ 3:58pm

One of the advantages to having a lot of years of market watching experience is that seldom does anything happen that as not been seen before. Price action in the soybean market this week caused me to reflect on other years when there has been a sharp drop in prices soon after harvest.

Without thinking too hard, I recall a very traumatic soybean market in November of 1980. While that was 32 years ago, I can remember the experience vividly. Some events are too graphic to forget!

Soybean prices had rallied strongly in the summer because of widespread drought. It appeared that the strong prices would last at least until the 1981 crop was well underway. May futures peaked out at $10.00 on November 15. Nine days down with five of those at the 30 cent trading limit took the price to $7.95 on December 8.

One of the first marketing principles that beginning marketers learn is that any violent move is followed by a retracement. Under normal circumstances, that rebound should amount to 50 percent of the initial drop. In the 1980 wash out in the soybean market, May futures went from $7.95 on December 8 to $8.67 on the first trading day in January.

That move of $.72 was a little less than 10% of the price at the bottom of the drop. Even at that, the $8.67 was better than the mid $7 area where prices finally headed as the market cooled off going into 1981. The summer of 1981 was a wild time in the grain market as well. Weather scare prices that summer were not nearly as high as in 1980. November futures that year finally ended back down in around $6.30. The rebound off of the low in November 1980 was an opportunity to price 1981 soybeans as well!

I have heard the terms “wash out” and “free fall” used to describe the soybean market this week. Whatever descriptive term you use, the fact remains that the soybeans still in storage from the 2012 crop need to be marketed. There was a true dead cat bounce  in October. It was the weakest bounce in the last ten years from the standpoint of duration and from the perspective of the extent of the price rally. A retracement is a viable strategy for pricing those remaining beans. As in 1980, I doubt that a 50 percent move is realistic considering how far the price has dropped. Any move higher of more than 10% from today’s price level would look good.

Setting price targets based on cash flow can be an indicator of when to pull the trigger. Do not forget that a new crop in South America will be coming into the world market about the time United States farmers are beginning planting. Keep an eye on spreads and basis as an indicator of when the demand for our beans starts to taper off and the Brazilian and Argentine crop becomes available.

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