Melvin Brees
Farm Management Specialist
University of Missouri Extension

 

 

 

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Please send your comments and send suggestions to Melvin Brees, Farm Management Specialist, University of Missouri Extension, #1 Courthouse Square,  Fayette, MO 65248, call 660-248-2272, or send messages by e-mail to: breesm@missouri.edu.
November 19, 1999

A Really Dead Cat?

A rally in prices, for corn and soybeans, typically occurs following harvest. This November-December price rally is sometimes referred to as "a dead cat bounce." If you climb up on a grain bin and drop a dead cat over the side--it will bounce a little when it hits the ground, but a dead cat won't get up and run! This description is used to illustrate the late year price bounce. Harvest pressure is over and prices recover somewhat, but the crop inventory is still hanging over the market. Prices act like that dead cat--they may bounce, but they don't get up and run. In fact, prices usually again decline before year-end and into mid-winter.

A "dead cat bounce" often provides a late year sales opportunity. Last year (1998-99) it was the only profitable sales opportunity! Soybean producers, who had taken nearly fifty-cent LDPs, netted nearly $6.00 for their beans by selling during the November 1998 price bounce. However, this year there has not been a post-harvest bounce in prices. So far the market has been a really dead cat!

This lack of a post-harvest rally has been somewhat hard to explain. Last week's USDA report was near expectations. This week's exports were better than expected and cash grain movement is slowing. Some analysts have described it as a technical situation occurring as result of long speculators getting out of a down trending market. Whatever the cause, time may be running out for a late year price rally.

Does this mean you don't do anything and can forget about marketing for awhile? Not necessarily! While futures prices aren't rallying, there are a few market signals appearing as a result of market carry and basis.

Market carry (difference between nearby and distant month futures) represents what the market is offering for storage. The December/March corn carry is about eleven cents (11-17-99) and the January/March soybean carry is only about six cents. This compares to storage costs of $0.10 to $0.18 for corn and $0.18 to $0.26 for soybeans, depending upon whether they are in bins or commercial storage, for the period. This does not suggest storage returns!

Basis (difference between cash and futures price) reflects cash market demand. Basis for both corn and soybeans has been weak (wide) for more than a year indicating weak cash demand. Basis is now beginning to improve, a signal that the market might be starting to look for cash grain. This combination of improving basis and small market carry suggests that a time for market decision-making is approaching.

There are really only two marketing reasons to store cash grain--capture market carry and basis gain. Speculating on higher prices can be done with less risk by using futures or options. If market carry is insufficient to cover storage costs and you are able to capture basis gains, it may be time to consider making cash sales and re-owning with futures or call options to take advantage of price rallies later in the marketing year.

-- Melvin


University of Missouri ExtensionDecisive Marketing - November 19, 1999
http://outreach.missouri.edu/agconnection/DCT/DM991119.html -- Revised: April 20, 2004
breesm@missouri.edu