How to Scale Sell Into a Rally

Posted on 03/09/2017 10:23 AM

A rally is the quickest way to pull bulls out of hiding. Suddenly those market analysts and experts that told you there was no chance for said rally to happen are telling why the market should keep going-even after an 80 cent run. Out of the blue all of those reasons for why the market should be trading to zero are discredited or even flipped 180 degrees and are now considered reasons why the market should trade higher.

Mass euphoria kicks in, we feel better even. Wake up in the morning, look at our screens give ourselves an internal high five and think about how wrong those people were that told you to sell 50 cents ago.

I love a good rally. Customers are in a better mood, business is getting done and things actually feel like they're happening again. In a bear market it is easy to forget just how good it feels to have green on the screen, right or wrong it actually improves my mood as well. It's just nice.

However, these are the times it is important to take stock in the whys and hows of what's taking place, dial back the excitement ever so slightly and as they said in elementary school, put on our thinking caps. Now's the time to remember those "if it gets back there I'm selling" thoughts we had, take a look at our P and L and do what we have to do to ensure we're going to live to fight another day.

In my marketing meetings I talk about determining when to make sales. Of course we've talked about knowing your breakeven so many times you can probably recite my thoughts on the matter in your sleep (ok, I really hope that's not the case, but if it is I'm both sorry and not sorry) and while selling at a profit should have the biggest sway on your decision making process there are several other factors in play you need to be aware of and ways you will want to tackle a market rally.

First things first, know and be aware of the market structure you're trying to sell in. The current bear market we're trying to work through has proved to be one of the most difficult. The surplus of commodities or perception thereof is not just a domestic issue anymore. The globalization that fueled the demand based rally of the late 2000's and early 2010's is now acting as the supply sided wet blanket keeping a lid on prices.

The high prices we loved so much have encouraged growth in production around the world, this competition has muted the importance of production issues within our borders. While we are still the largest producers of quality grain and oilseeds in the world the fact that Brazil, Argentina, Russia, Ukraine and China (just to mention a few) have the ability to increase their production with some encouragement via price keeps us walking a fine line between bullish enthusiasm and extreme bearishness.

I'm not telling you this to repeat the obvious or make you sad, I'm simply stating the current market structure in which we're functioning. This doesn't mean that things could change and change relatively quickly, they always do, but the likelihood of us waking up tomorrow to a totally different set up is extremely unlikely. Many credit the 2012 rally strictly to the drought, when in reality there was a whole host of secondary reasons fueling the price boom (explosive demand growth, huge Chinese corn imports in 2011, a weak dollar, production declines in our competitor countries, etc.) this means that while the tide will likely change it could take years to realize the difference.

In a bear market structure like we're in I tell guys to keep in mind a 5% return on growth is great, a 10% phenomenal. In soybeans we have currently hit and surpassed the 10% gain phase from our lows and while no one knows when the market will stop gaining-it is important to work to take advantage of these gains and start pocketing some of them for your operation.

Unfortunately a 10% rally tends to be when the noise hits a fever pitch. Suddenly everyone's in such a hurry to nail the top they forget about those thoughts they had 80 cents ago and become focused instead on not missing out on even a penny worth of price gain. This is where scale selling into a rally becomes your number 1 priority.

I'm not going to lie; my big producers and I started selling old crop bushels that were on basis, dp or in the bins unpriced a while ago. The lack of ability to trade through $8.85 on the front month had me hesitant to roll the dice on the full lot of bushels they had to sell. We slowly started with 10-20% sales in old crop and by placing higher valued target orders on expected new crop production. When making determinations on when and at what price to sell time and cash flow have to play a role and did with the initial old crop sales we were making.

As the market gained in value the sales started to pick up. As the November board moved through $9.00 we started dipping our toe in the new crop sales pool, taking 5-10% of production off and selling it through either cash sales if the beans had to move at harvest or through HTAs if there was flexibility on when the bushels would have to enter the pipeline. Upon selling the first chunk we put another 5-10% of production in place via target orders at 25-35 cents higher, with the thought that once those filled we would look to see how quickly it took us to gain another 25-35 cents putting another chunk in place around those levels.

While I can already read the letters I'm going to get telling me that those numbers are below breakeven, I want you to keep in mind that each particular situation is different and only you know when it's a good time to sell for your operation. But for those of you currently sitting frozen wondering if now's the right time to start booking sales or not because you know you can eek out a little bit of profit, I say it's time to get started if you haven't already.

The most important thing to keep in mind is to sell incrementally. You start with the 5-10% of production and build a plan from there. Keep in mind reasonable price increments at which you'd like to add additional bushels and realize how your average cash price will continue to improve as the market moves higher and you continue to sell. In the current market structure we are in rolling the dice on the hope of a production issue taking place is far from safe and definitely not a reasonable business practice.

If you are comfortable with using options as a secondary form of price protection do so, but please keep in mind the hidden costs associated with this approach and make sure you factor them into your costs. Also make sure you are working with someone you trust, many times a market rally will encourage those selling snake oil to come out with a fool proof plan of ways to have your cake and eat it too-if it sounds too good to be true it probably is, so be aware of what type of strategy you are employing before diving in head first.

Above all do away with beating yourself up if the market moves higher after a sale. YOU WANT THE MARKET TO MOVE HIGHER AFTER A SALE-YOU CAN'T SCALE SELL IF THE MARKET DOESN'T MOVE HIGHER (sorry to yell, but I cannot emphasize this point enough). Instead of focusing on the 10-30% you have sold at lower prices keep in mind the 70-90% you have left to sell, not to mention the new crop bushels you will produce next year.

Never underestimate the cost of having peace of mind that comes with knowing you have X amount of bushels locked in at X price. It ensures cash flow and guarantees that no matter where the market may head you will be able to remain an active participant.

As always don't hesitate to contact Pro Farmer or myself with any questions. We're here to help!

You can find Angie on Twitter at @GoddessofGrain or email her.

The views, opinions and positions expressed by the author are theirs alone and do not necessarily reflect the views, opinions or positions of Pro Farmer.

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