A member of our discussion group forwarded some questions to me today about the soybean market, and I think the topic may be timely for others as well.
It started with a recommendation in the last day or so from a marketing service to sell new crop soybeans. The first question was whether or not I had comments on the recommendation.
Before I stick my oar in the water and start splashing around, let me remind everyone that my focus for the website is to help you decide what to do with information and recommendations. I think this is a learning moment and worth some discussion.
The crop report from last week is bearish, and certainly there are many advisors making a point that there is only limited upside potential and substantial downside risk. So, in a nutshell, this recommendation to sell is consistent with many others. But don’t forget that just this morning one of the marketing guests on the farm show thought we were making a bottom. So you can probably find someone to support any action you want to take.
I don’t have a crystal ball, and I can’t see how much more planting delay or weather scare we will have any better than anyone else. I look to the technical indicators for my answers. If you have been trying to learn about some simple tech indicators and have been looking at the 5 and 35 day moving average crossover on the Dec 13 corn chart, plot it on the Nov 13 soybean chart. I will insert a chart for those that don’t have an easy way to plot moving averages. (Click on the chart if you want to enlarge it.)
Oh my! In a few seconds it is obvious that the trend has been down for several weeks. First painful rule in marketing: that is water over the dam and you can not let it influence the decision at hand today. The only question you need to answer is whether you believe the trend will continue down and price will go lower. I can’t tell you if this is a good time to sell beans, but I can tell you that the MA(5,35) technical indicator shows that the trend is down so it matches up with the marketing service recommendation.
The second question was about using cash, futures, or options to make the sale if that was the action of choice. If you will only sell the crop once and not consider lifting your protection even if there is a rally later, cash will be the least cost and easiest to execute. But unless you can buy back the contract at a reasonable fee, a cash contract will create some problems if the bulls are right and prices do rally. So if you are considering lifting your protection, a cash contract falls to the bottom of the list unless you have arranged to be able to buy it back.
Now futures versus options. In general, futures contracts will produce a higher net realized price than option contracts based on two factors. First, the time value of the option will decay over the life of the option. Second, the option has a delta value less than 1.0, unless you are deep in the money, so that the option value will only move some proportion of the amount that the futures contract moves. The main advantage of the option contract is that you retain the opportunity to benefit if the market moves up. The advantage of the futures contract rest heavily on two things: how certain you are about the trend, and how willing you are to lift a futures contract. Bottom line, knowing the trend holds the key to the success of this choice.
Finally, let me briefly introduce another technical indicator that I find very useful to help with questions about where the market is going. I bring it up now because it may provide additional context to this discussion. I am speaking of a series of numbers known as Fibonacci numbers. You can look up the concept if you are interested in more detail, but just let me say that it works well for me to project price windows from price chart data. The window is a range where the market has a high tendency to pause to make a correction or to reverse the trend. Without getting anyone bogged down in detail, let me just say that the currently projected range for a soybean price window is from $11.45 to $10.65. Prices can reverse before they get to this window, or they can go on down past the window, but this is an area where there would be an increased probability that the market will turn up.
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Posted by Keith D. Rogers on 15 May 2013.