As mentioned in Thursday's Early Word Grains, soybean basis is in its higgledy-piggledy seasonal phase where different cash merchandiser bid off three different contracts. A few are clinging to the August, some have rolled their positions to the mostly irrelevant September, while others are moving their positions out to the new-crop November. Of the three, the latter provides the most thrills with the November now reflecting both old-crop and new-crop issues.
Given that one of the keys to any market is its basis (price difference between the cash market and futures market), and soybean basis can be easily skewed at this time, the next best alternative to understanding real market fundamentals (not the one's released by USDA each month) is by studying futures spreads. As most of you know, futures spreads are the price differences between futures contracts, and remains a key defense of commercial traders against moves by the noncommercial side of the market.
In the case of soybeans, notice that the four new-crop soybean futures spreads are all indicating a move to uptrends. Led by the November 2014 to January 2015 spread (red line), the long-term commercial outlook toward soybean supply and demand appears to be growing more bullish. This is somewhat of a surprising development IF one believes recently released supply and demand figures from USDA.
For example, the government was able to increase old-crop ending stocks by taking residual use to (-69) mb, a move that is expected to precede an increase in 2013 production. The ripple effect of the higher 2013-2014 ending stocks is that it becomes 2014-2015 beginning stocks, resulting in larger total supplies and theoretically more ending stocks.
But look again at the trend of the November to January futures spread. After posting a low weekly close of a 9-cent carry (week of July 7, or the week of the last USDA report), the spread has seen its carry trimmed to 6 1/2 cents through activity this week. Important resistance on this weekly close chart is at the 6-cent carry level (close from the week of June 23). A weekly close with a carry less than 6 cents would indicate this move is more than just a rally off the recent low and that an uptrend has been established.
What is supporting the commercial side of the soybean market? Since the November is now playing the dual role of old-crop and new-crop, the answer is also two-fold. First, the rally (weakening carry) in the November to January futures spread reflects the ongoing tight old-crop supply situation as the 2013-2014 marketing year comes to an end in the face of continued strong demand. But with similar moves seen in the January to March (black line), March to May (blue line), and May to July (green line) spreads there is also indications that the market is not convinced of USDA's cumbersome ending stocks estimate of 415 mb and ending stocks to use figure of 11.7%.
Again, the normal progression for changes in trend starts with basis, then futures spreads, and finally the futures market. With soybean basis hard to read at this time, indications of a change in price direction over time (trend) by soybean spreads could ultimately lead to a trend change in the futures market.