My most recent On the Market column (Changes in Latitudes, Changes in Attitudes) talked about the move to a downtrend in corn futures spreads reflecting a change in commercial outlook toward that market. In the piece I also mentioned a similar situation in soybeans, shown in the attached November 2012 to March 2013 spread chart.
I used the November to March because it is the timeframe -- the first 6 months of the new marketing year (September through February) -- when global supplies could be at its tightest given continued strong demand from China, reduced production in the US, and low exportable supplies from South America until its next harvest expected to begin in March 2013. However, as the chart indicates, there is something else going on in the market that seems to be running counter to the bullish general consensus.
Notice the sharp downtrend the spread has been in since it posted its peak of a $1.47 1/2 inverse the close the week of July 16. The inverse in the spread has trended down (weakened) to the point that last Friday's close of a $0.36 1/4 carry was a test of key support near $0.35 1/2, a level that marks the 67% retracement of the previous uptrend from the low of a carry of $0.19 3/4 (week of December 27, 2011) through the July peak. Early trade this week shows the spread holding near this support, though the important number will be this coming Friday's close.
Possible answers as to why the spread is trending lower are: a) better than expected US yield and production b) a slowdown in Chinese demand c) other (unknown) d) all of the above. The truth is we won't know until later, possibly much later, what the catalyst for the selloff was. What's important is realizing there has been a change in attitude toward soybean fundamentals, whatever the reason. And while still long-term bullish, after all we are still talking about a market showing a solid carry, it will be interesting to see if this short-term downtrend establishes a clear break of technical support and just how much further it might drop.
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