A deceased feline’s reversed trajectory (or ‘the dead cat bounce’)

Several decades ago, a commodity market analyst said that if you drop it far enough, even a dead cat will bounce, and ever since the “dead cat bounce” has been a part of the trader’s lexicon. Graphic metaphors aside, the grain markets have dropped far enough since the June 28 USDA Report that a reversal of the market’s direction seems in order, but what will it take to make this happen? and how soon can we expect it to occur?

In terms of the trigger to start the turnaround, there is significant issue with old crop grain stocks in North America. We all know that last summer’s drought reduced yields and resulted in lower grain production in 2012. Even the extremely bearish USDA, has admitted that ending stocks of both corn and soybeans are very small, and this year’s late spring seeding would suggest that there will not be very much early harvested 2013 crop. In simple terms, last year’s small crop will need to last 13 months instead of 12. A tightening of old crop inventories does not fundamentally change the new crop dynamics, but it could force a turn around in the old crop futures, which would pull up the whole grain market. Basis bids for old crop corn throughout most of the U.S. Interior are curiously high at this time, which suggests that the end user is already paying up for old crop grain; now it is just a matter of getting the futures market to follow.

There are also a series of widely publicized crop evaluation tours crisscrossing the U.S. Midwest in the final days of July and the early part of August. So far, most of the crop reports coming out of these tours have not provided the market with any reason to worry, although the number of unseeded acres is worthy of some concern. A couple of bad reports from a couple of high profile tours could also trigger the start of a retracement.

Not to over-use the metaphor, but dead cats don’t bounce very well. What we are looking for is a retracement of a portion of the downward move, and not the start of a whole new upswing. Typically a retracement is only about half of the original move. If September corn futures slipped from $6.10 to $4.90, the $1.20 downward move would suggest that a $0.60 retracement could be in order. Having said that, I would discourage anyone from betting their paycheque on a full 50% retracement in a bearish market with a big crop looming. Targeting some sales at a 30% retracement is a more achievable and likely target.

In terms of timing, it is almost certain that the recovery will occur while we are still in old crop, which suggests that it will need to happen this month. Texas and the Gulf states typically harvest corn in August, so by the time that we get into mid-September there will be enough new crop supply available that futures will have a tough time finding a reason to rally. If we are waiting for the cat to bounce, we shouldn’t have to wait too long.

If your marketing plan still has a few sales gaps to fill, the limited upswing that lies ahead is going to provide an opportunity to get those loose ends tidied up. The ability of the old crop futures to pull the new crop contracts up with them might also create a chance to put on a few more harvest sales at the same time.

Special thanks for Allen Douglas of FCStone for his contributions.