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Know when to sell - Roy Smith

After a big run-up in prices such as has been the case in recent months in the soybean market, the logical question is “How do I know when to pull the trigger”?

It should be so simple. Set a price and put in an order. When that price is reached, sell something. In fact, that is the approach I use in my “Dead Cat Bounce” strategy.  For many years, selling at price levels of 50 cents, 75 cents and a dollar above the harvest low worked very well in adding several cents per bushel to the value of soybeans that I raised and marketed.

Last year the strategy was not so successful. It resulted in a sale at $11.58. That compares to yesterday’s price of $14.19. The net is $2.61 less for the sale made last fall. That is enough to make me look for a different strategy for 2012 crop soybeans.

Another possible approach is to use some kind of technical system. When I first started studying markets I looked for a moving average approach that would give me a signal. Using what was then state-of-the-art spreadsheet software, I concluded that a 5-15-45 day moving average did the best job of picking a trend that would generate signals when to sell and buy soybeans. Applying the 5-15 system to current markets, it would have had the farmer sell November beans at $13.37 and buy back at $13.81. That is clearly not what I want in my marking portfolio.

That experience illustrates the weakness of a technical system. In this case it would have generated a big loss. Under some circumstances it would have made the sale after much of the move was past. It is difficult to design a technical system that works in both a short-term and long-term price move. Any technical system will have odds of failure that must be dealt with. A strategy that results in profit 70 percent of the time is very good!

The approach that I have promoted over the years has been to look for times during the marketing year when prices are likely to be high and target sales during that time. Even that approach has a probability of being profitable roughly seven times out of ten. When two of these strategies can be used at the same time the odds of success are greatly improved. I used that approach this week to forward contract the first increment of 2012 crop soybeans. I know that the first week of May has high odds of being a high price time in the soybeans market. From previous experience I also remember what $13 dollar soybeans do for my cash flow.

Because the basis on new crop soybeans was at least 25 cents better than last year at this time, my decision was to make the sale in the cash market. Last week I put in the order to sell at $13.00. It took a few days to fill. I am happy that the first increment of soybeans was priced at a very good level out of the field with no storage costs. If the price goes higher from here I will be happy. More increments can be sold later as growing conditions develop.

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