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Corn+Soybean Digest

Use Price Retracements To Make Sales

"How low can soybean prices go, and will prices ever rally back?"

That question was from a young farmer who had just harvested his soybeans.

"Even with 52 bu/acre, I still can't make any money," he said.

Several reliable price cycles suggested a major low in soybean prices this fall. Even though I was aware of these cycles, I was amazed at how low prices dropped into September.

The combination of a big U.S. crop, slow global demand and widespread use of the loan deficiency payment program dropped prices to the lowest level since 1986. The price reversal during October confirms that September was a major low in soybean prices.

If prices are going to rally back up, how many bushels to sell and where to place your offers are key questions. I use a combination of market analysis methods, but one of the key tools I've used for over 20 years is price retracements. Some market analysis methods are subject to a lot of interpretation. I like the retracement analysis method because it gives you specific prices where you can place your offers.

Review the May 1999 Chicago Board of Trade (CBOT) soybean chart (see printed article). It shows a double top at $6.69, with the last high made during the weather scare rally that peaked on June 24, 1998. From that high at $6.69, the price dropped $1.30/bu to the low made at $5.39 on Sept. 1.

A review of long-term soybean price action shows that prices will retrace at least 38% of the move 60% of the time, half of the move 50% of the time and 60% of the move 38% of the time.

To compute the first objective, take 38% of $1.30, which is 49 cents. Add 49 cents to the $5.39 low and the objective (which was hit) is at $5.88. The second objective is 50% of $1.30, or 65 cents/bu. So the second selling objective is at $6.04. The last objective is 60% of $1.30, or 78 cents/bu. A 78 cent rally from the $5.39 low sets up a sales objective at $6.17 May CBOT futures.

Now how do you implement the plan?

First, check your local basis. I've selected the May CBOT futures because April-May is often the time when you get your best basis bids. This is especially true if you are near a major river where bids almost always improve when the barges start rolling.

If you get the rally to your price objective and a good basis, make the sale. Second, decide the number of bushels you want to sell at each level and call your sell offer in.

Now is also a good time to review how many bushels you need or want to sell right off the combine next fall.

Review the November 1999 chart (see printed article) and get some offers called in to make new-crop sales as well.

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