Technically Speaking
Darin Newsom DTN Senior Analyst

Saturday 10/27/12

Cash Soybeans Set for Seasonal Rally

Seasonally, the soybean market tends to post its low in October, leading to a sizeable rally that ultimately results in a 31% gain in the futures contract (weekly close only) and a 33% gain in the DTN National Soybean Index (national average cash price weekly close only). To better understand the gain in intrinsic value of the market, discounting rolls due to futures spreads, I prefer to look at the seasonal move in the cash price.

Source: DTN

As the chart shows, the five year seasonal index (blue line) of the NSI.X shows a low weekly close tends to occur the first week of October at 82% of the average annual price. Interestingly, this is three weeks ahead of the seasonal index for the front-month futures contract (not shown) indicating demand for cash supplies increases as harvest nears its normal end. By the close of the first week of July the NSI.X tends to close at 115% of the average annual price, a gain of 33%.

For the 2012-2013 marketing year (red line), the NSI.X posted a low weekly close the third week of October at $14.88. If the NSI.X stays in step with its five-year seasonal index that would project a target price by early July of about $19.80 (dashed red line). Based on the low weekly close of front-month futures of $15.22 1/2, the futures market is projected to post a high of approximately $19.95.

Comparing these two numbers implies a national average basis (NSI.X minus nearby futures) of about 15 cents under. A look at the five-year national average basis chart (updated each Wednesday on DTN) shows this to be well above the average basis of for that week of about 43 cents under, and also above the strongest basis has been the last five years of roughly 22 cents under.

In other words, and not surprisingly, the cash market is expected to outdistance the futures market due to tight global supplies and continued strong global demand over the winter and early spring. Those who subscribe to DTN's strategies on the Pro System are holding a substantial percentage of cash beans from the recent harvest for this very reason. Those with the Pro System can check its current positions on the table accompanying daily updates.

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Posted at 10:59AM CDT 10/27/12 by Darin Newsom
Comments (6)
Will the soybean market movement pull the corn and wheat markets? It seems possible if the price relationship between corn and beans exceeds 1/ 2.2. I see the corn demand reviving, which is needed if the market is to advance much, if beans would exceed 16.50. Dreaming? Maybe. Mike
Posted by Mike Baker at 9:35AM CDT 10/29/12
Darin; How much are those who subscribe to DTN's strategies holding? Mike
Posted by Unknown at 9:54PM CST 11/05/12
Still no sign of the seasonal rally...coming up on 2 weeks since this post. All these historical signs, from technical points to seasonal indicators, seem to be on thin ice. Just tough, tough markets. Long way to go though.
Posted by Peter Smith at 12:23PM CST 11/08/12
A number of good comments and questions. Some have been answered by market movement already, but I'll add my belated two-cents worth. Corn and wheat have held in sideways patterns despite the ongoing downtrend in soybeans. However, this could change if noncommercial selling in the soy complex doesn't end soon. As for DTN Strategy holdings, 60% of production was forward contracted or sold leaving 40% to be marketed. And yes, the seasonal rally has not materialized. I will put together a column discussing in greater detail some of the issues facing seaosnal indexes at this point. Thanks to all for your questions and comments.
Posted by DARIN NEWSOM at 7:49AM CST 11/12/12
What just happened? Can someone tell me how we can go from having to ration beans to having a huge supply,when harvest has been over for a month.Earlier in the year U.S.D.A. said supplies would be at an all time low with trendline yields of 47bu. Now they what us to believe 37bu. is all that is needed.South America is having a few problems as I understand, dry in some areas rust in others.If U.S.D.A. is counting on them to have a bumper crop, they were also counting on us to have a huge crop.Going in to spring 2013 worries me a little as we have no moisture reserves. The top 5 or 6 in. are moist but that is it.And as far as corn, our local ethanol plant has gone to grinding 7 days aweek to make sure they can even get corn. It is a 50,000 bu. aday plant so corn in our area won't last long.But I just want somebody to tell me how half a crop is more than enough. Thanks!
Posted by Raymond Simpkins at 7:19AM CST 11/14/12
Good morning Raymond. This selloff in soybeans has little to do with fundamentals, driven more by continued noncommercial (speculative, investment, fund, etc.) long-liquidation. As I wrote about in my On the Market column back on October 26 (The Haves and the Have Nots) at some point this side of the market shoud get interested in markets that have long-term bullish fundamentals. A small group of markets that includes soybeans and soybean meal. I know there is a great deal of chatter out there, but to monitor what the market thinks the supply and demand situation actually is, keep a close eye on futures spreads. In soybeans, the forward curve (series of futures spreads from January through July) continues to show a strong inverse meaning those actually involved with the cash side of the market are long-term bullish. Thanks again for your comments.
Posted by DARIN NEWSOM at 9:34AM CST 11/14/12
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