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Dead-cat bounce rises late

In marketing, there are few things that can be described as “always” or “never.” In my years of grain marketing research, the move I long ago named the dead-cat bounce comes closer to the standard of “always” than any other move during the marketing year. Every year, there has been a rally off of a major low in soybean prices during the September-through-December period. This major low has come as early as the first week of September and as late as in December. It most often occurs in early October.

Some doubt bounce in inverted market

Farmers with marketing experience question if the bounce strategy is less effective now that many marketers are aware of it. This question comes to mind after 2012 when charts of cash soybeans and March futures looked different from before. This disparity between the two sets of prices was caused by an inverted price structure. In other words, cash bids in some locales were higher than futures prices. This made it difficult to analyze exactly what the futures market was trying to tell us.

Experience shows that when cash bids are higher than futures prices, the market is telling you it wants the grain now, not in the future.

During harvest in 2012, the high March futures price on September 10 was $16.54. On November 30, it was $13.99. If you watched the signals and sold in the early part of harvest, you were more than $2.50 better off than those who waited.

Even with a drop of that magnitude, the sales made on the dead-cat bounce were at a higher level than if soybean sales would have been made after harvest was over. The cash bid on October 15 was 88¢ better than the price on November 1.

The record of price action in 2012 shows how difficult it sometimes is to time sales correctly on the dead-cat bounce. In other recent years, prices followed the normal pattern more closely.

Recent history

In each of the past 10 years, there has been a low in October that could correctly be called the harvest low. In seven of the 10 years, the top of the bounce was in November. In three of the 10 years, the high came in October. In rare years, such as 2003, the rally continued on into the following year. However, it was more common to see prices turn and gradually drift lower into January or February and then rally on into the spring. Every year is a little different!

Advantages of selling on the dead-cat bounce are many. Probably the most important is the absolute price. Since soybean and corn prices escalated several years ago, the rally potential of the bounce has increased along with the average price level. The fact that more farmers are now using this strategy does not seem to have limited the top-side price potential. The price during the bounce is probably not as high as if preharvest sales would have been made during a weather rally in June or early July. It will, however, probably be higher than a sale made at the beginning of harvest. It will also probably be higher than later in the winter.

To implement the dead-cat bounce strategy, keep track of cash bids at your local elevator around September 1. Watch for the price to rally a minimum of 35¢ over the harvest low. Timing of the low is a judgment call. In high-price years, the bounce can be more than $1 a bushel. Sell in increments once your price target has been reached. Be done with sales by December 31.

The same techniques work with marketing corn. The timing will be different. The potential rally is less.

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