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What's ahead-Roy Smith

08/10/2012 @ 3:30pm

It seems that the market is full of surprises, even when fundamental factors should already be bid into the current price. Wednesday’s soybean market is a good example. A brief thunderstorm hit my farm Wednesday evening. There was a little hail and some damaging winds. One corn field near the river was pretty much flattened. Nonetheless, I was glad to see the inch of rain that came with the storm, because it will give the soybeans an opportunity to grow a few inches and put on a few more pods. 

I would normally think that rain falling in an area that had previously been very dry would cause prices to drop sharply the next day. Instead, nearby futures closed the day 60 cents higher. November futures were up 50 cents. So much for using logic to predict prices! When I do a marketing workshop, I am frequently ask about the strategy of selling new crop grain a year or two ahead. My standard response is that I have never done it, but anyone who wants to use the strategy should try to make the sale at a time of extreme bullishness when futures are sharply higher. Yesterday would qualify as one of those times when forward pricing 2013 or 2014 corn would seem logical. 

Before I undertake a strategy that I am not familiar with, I like to look back and see how it would have worked in prior years. To test this theory, I looked at a graph of the last 20 years of December corn futures. I then sorted out years of low production and high prices from the years 1974-2010. The years of 1975, 1981, 1984, 1989, 1996, 2003 and 2004 followed years of low production and high prices. I made a chart of those years from January 1 through November 30 and compared it to the 20 year average. 

Surprisingly, the charts looked remarkably similar in both the shape of the graph and the general price level until about the middle of August. For the rest of the year, the price dropped off dramatically in the target years. However, they were mostly flat in the more recent 20 years. 

This tells me that forward pricing for next year can be done any time from now until April of next year, when there is a spike in price. I have not yet tested the same theory for soybean marketing. When I do, I will be surprised if it follows a different pattern. 

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