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Watch basis for 'dead cat' drop

12/06/2013 @ 3:44pm

Basis is one of the most important factors in judging when a dead cat bounce might turn and go down. I watch basis every day to try to detect the turn as early as possible. My local elevator began using the January soybean futures on October 30. 

On that day the basis was -.42 under January futures. That must have been a one day deal because the basis quickly went to -.50 and stayed there for several weeks. On November 12 the basis went to -.45. For my area that is pretty good basis historically. No doubt it reflected  excellent demand for cash beans.

On December 2 the basis went to -.50. Wednesday it went to -.55.  Basis is very important to my marketing plan because I had beans hedged in January futures for $13.50. Basis of -.50 meant that my net on the hedged beans was almost $13.00. It was time to cash in! When the dust settled Thursday morning my net ended up slightly less than my goal of $13.00 after subtracting storage cost of seven cents and a couple of pennies of commission. That is still a price that is profitable for most farmers in my community given the good yields this year.

The soybean market still looks positive. The cash bid at the close of trading Thursday was $12.75. That is 25 cents short of the dollar benchmark I have spoken of in earlier columns. The highest cash bid has been $12.92 on November 29.  The drop in basis of ten cents in less than a week is a warning that there is a top out there somewhere sometime. The potential for a huge South American crop hangs over the market later this winter. I want to be out of cash beans before those beans hit the world trade. The break that will be caused by South American sales will probably be sooner rather than later.

Meanwhile, I am looking for a price on July futures to sell the carry on corn stored over the winter.  There are some currently attractive basis offers to keep the ethanol plants operating. If you are in an area where ethanol plants are pushing the basis, it might be to your advantage to sell the cash instead of storing until next summer hoping for price appreciation.

 There are futures and/or call option strategies that will reduce down side risk if you want to be long the market until next year. The premium being offered by some buyers on corn for immediate delivery will offset some of the cost of these strategies. 

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