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Don't own the horse

Agriculture.com Staff 09/21/2007 @ 10:45am

My column last week drew a lot of comments from individuals thinking I was predicting that wheat prices were going to drop. That is not the case. I was simply pointing out that we need to keep the current prices in perspective.

As it turned out, the magic number for wheat futures was $9.00, at least for this week. Prices have struggled this week. I know that the scenario for wheat is very bullish. I know that wheat demand is inelastic. I also know that the news is always most bullish at the top and that there was a key reversal in the September wheat chart before it went off the board. Time will tell whether there are still buyers for $9.00 wheat. A pennant formation on the charts after expiration of the September contract may be a sign that a break out is coming. I will not guess whether it will be up or down.

The 'Dead Horse' theory of pricing is one of the ways I explain the kind of emotional situation that existed in the corn in June and the wheat markets in the past month. It is based on one of my favorite farm jokes. It seems that there was a farmer who owned an old horse that had served out its useful life and needed to be put to sleep. Before undertaking this unpleasant task, the farmer decided to try to sell the horse to his neighbor.

Much to his surprise, the neighbor offered $10, which the farmer gladly accepted. That night, however, the farmer got to wondering why the neighbor was willing to buy a horse that everyone knew was worthless. He thought that the neighbor must know something he didn't, and decided that he had to have that horse back. The next day he went to the neighbor and bought the horse back-for $20.

Now it was the neighbor's turn to wonder what the original owner had found out about the horse while the animal was not on his farm. He worried so much that night that the next day he bought the horse back-for $40. This trading went back and forth until the price got very high. Eventually the word of this remarkable animal was published in media across the country. One day a pickup with a stock trailer pulled into the yard. The driver, obviously a city slicker, offered to buy the horse for $1 million. The farmer gladly accepted. The horse was loaded into the trailer and the happy new owner, with trailer in tow, left. As the pickup was pulling onto the county road, the second farmer drove into the yard.

When he found out what had happened, he was furious. "Why did you sell that horse, you and I were both making a good living trading that horse?" The wise old farmer replied, "Yes, but one of these days that horse was going to die, then you and I would both be out of business."

All commodities at some point get to the 'Dead Horse' level where the price offered is far above what the supply and demand would indicate it should be. I don't know where that is for our crops. We may have hit the short term highs for corn and wheat. I do not make predictions, but I doubt that we are even close for soybeans. With the greatly reduced acreage this year, any minor downward surprise in yields or planting problems in South America could make this the most exciting year ever for soybean prices.

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