SOY SECRET
by George Kleinman
Editor, Commodities Trends
October 1, 2007

Today I plan to share with you this market �secret�: Soybeans exhibit a very strong tendency to form a seasonal price bottom during the month of October. This bottoming tendency is the result of harvest selling pressure because many farmers sell their crop right out of the fields to generate cash.

This year, with soybean prices relatively high, this market behavior could be even more pronounced than usual. After the harvest selling pressure subsides, the soybean market usually exhibits a profitable post-harvest rally trading opportunity.

When I went back to quantify the probabilities for a soybean price rise post-harvest, what I discovered was actually quite exciting.

My database goes back to 1968. In the spreadsheet below, I sorted the data not by year but by the percentage gain the July (of the following year) soybean futures contract made from the October low price to the high for each year�s July contract (last column).

The Risk column refers to the maximum price break (measured in cents per bushel) for that crop year under the October low price (post-October). The Gain column measures (in cents per bushel) the highest price achieved after the October low was registered through the following July.

July Soybeans

Source: Commodity.com

Let�s analyze this data to develop a trading plan.

Looking at the last column first, note there were only two years with zero gain, meaning there were only two years when the month of October was a high-priced period for the July contract. For 37 of the 39 years, there was at least some price gain above the October lows. However, trading is never as easy as just buying in October and selling at a profit sometime later; we have to be realistic based on some risk-to-reward criteria.

Realistically, there were seven years (1974-75, 1981-82, 1983-84, 1990-91, 2004-05, 2005-06 and last year) where I make the assumption a trader who knew about this October market secret may not have profited because there was a measurable price drop from the October lows prior to any big gains. (These years are in red.)

For example, last year, even though the market eventually gained 11 percent from the October 2006 lows, I placed this year in the losing category because the market made a lower low in November. This lower low (below the October low) was only 20 cents per bushel, and it was followed by a big rally post-November, so it's very possible a trader actually would have profited last year on this seasonal tendency.

However, to be conservative, I placed years such as this one in the losing category. Still, even if we include years like this in the red category, there was an excellent chance to make a nice profit with minimal risk by buying in October in fully 32 of the 39 years; this is greater than 80 percent of the time or, in other words, excellent odds.

This year, although we're about a month away from definitively knowing what the October low for the July 2008 contract will be, the odds appear good; soybean prices will be higher next year. Too many farmers planted corn this past year at the expense of soybean acres, and the US Dept of Agriculture (USDA) projected ending supplies are only about 200 million bushels, a relatively tight supply. The reported yields to date have been inconsistent, and export demand remains at extremely high levels. The dollar is weak, and therefore, I look for exports to remain strong.

Conclusion

Our secret, plus market conditions, appear to be setting up a favorable reward-to-risk ratio for entering a long position in the soybean market sometime this month. I�ll be looking for a good technical entry point for my Futures Market Forecaster subscribers.

What do you say? How about we keep our market secret just between us?

Good luck and good trading.

© 2007 George Kleinman
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