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An unusual year for marketers

I sit here at my desk pondering the latest government report and the grain market’s reaction to it. My first thought is that 2012 is certainly an unusual year. I think back to some of the events that got us to this point and wonder if it really has been an unusual year. Certainly the price levels at this point are unusual. The year stated the first meek of January with cash corn at $6.30 and soybeans at $11.50. After three months corn was still $6.30 but soybeans had rallied to $13.50. Another month went by with corn still at $6.30 but beans now at $14.50. It is not unusual for soybeans to rally in the spring or for corn to be at relatively the same price in June as in January.

For years we have dreamed of beans in the teens. We finally got that price level solidly in the spring of 2012.  Meanwhile the corn market seemed to be satisfied in the $6 level until late May. Planting earlier than ever in history convinced traders that record corn production was only months away. Consequently new crop corn traded at a big discount to cash even after the cash bids broke through $6 support. That was certainly an unusual price situation compared to the normal premium for deferred contracts compared to nearby contracts.

When the much-needed rain did not develop prices for both grains shot higher. For both corn and soybeans the early summer price low was in early June. That pattern is unusual. With dry conditions already underway, it would have been logical to have had the low a month earlier than it was. Markets do not always follow logic. They did not last summer. The market finally decided that the drought was for real and a top was made in the corn market in August. In the soybean market a weather rally high was put in on July 20 followed by a second high on September 4.

The soybean market then made one of its most predictable moves in history. It dropped from $17.68 on September 4 to $14.92 on October 15. On my seasonal charts I call this the frost scare rally followed by the harvest low. That move was not at all unusual except for the high starting point over $17. We should have all read this signal and sold everything we could get our hands on! However, the mood was not focused toward selling because the August rain we normally get following a hot dry summer did not materialize. In 2012 I had the worst looking soybeans I have raised since 1984. At that point I would have sold out for 20 bushels per acre.

Harvest started in August for most farmers in my county. Much to our surprise yields were only slightly below the long term average. It was not the bumper crop we had planned for,  but it was not a disaster either. Now we are in the situation of underestimating our production and needing to market the remainder of our crops at a price that is below the summer price peaks. Some of the old tried and true signals are working. Others are not so good. The dead cat bounce came and went. It reached a price of $.86 over the harvest low on October 15. It exceeded the normal 35 cent bounce. It fell short of a 12% rally I hoped for.

In deciding when to pull the trigger on sales I watch for weakening basis as an indicator of lowering demand. The situation is just the opposite in soybeans. The basis has been steadily improving since harvest ended. In addition the local processors are offering a premium for immediate delivery. That almost never happens in the depressed market. Spreads between January beans and May beans are inverted. This is also an indicator of good demand. Thursday of this week these premiums in the cash market were extended a week. That is also usually a sign of better prices ahead.

My conclusion is that this really is an unusual year. Marketing decisions are always tough to make. It is tougher when some of the strategies that have been tested over many years fail to work as they have in the past. Even more frustrating is the fact that record high prices mean a lot of dollars at risk. The big question now is whether the old principle of “Short Crop, Long Tail” comes to pass as the fall out of the 2012 drought plays out.

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