Technically Speaking

Soybean Spreads Tell Real S&D Story

Source: DTN ProphetX

To those of you who came to this blog after reading Wednesday morning's Early Word Grains comments, expecting an analysis of the March soybean contract, I apologize. I will post that chart in this weekend's update of weekly analysis for the grains complex. Instead this morning I want to discuss a different aspect of the soybean market, its futures spreads, because it implies a radically different view of global supply and demand than what is expected in the January WASDE report set for release next Monday (January 12).

Before we move forward, let's take a step back and revisit the world supply and demand numbers from December. That report pegged total global supplies at 379.39 million metric tons, due in large part to an estimated record production figure of 312.81 mmt. The latter includes an estimated record production in the United States of 107.73 mmt (3.958 bb), and projected record production in both Brazil (94 mmt, 3.454 bb) and Argentina (55 mmt, 2.021 bb).

On the other side of the ledger, global demand was projected at a record high 286.07 mmt. This includes a record large Chinese import estimate of 74 mmt. The net result is projected ending stocks of 89.87 mmt (also record large) with ending stocks to use pegged at 31.4% (you guessed it, another record for a marketing year)

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Given that set of data, die-hard fundamentalists would conclude without question that world supply and demand is bearish. But as ESPN's college football analyst likes to say, "Not so fast my friend."

If you've followed my analysis over the years you recall that I couldn't care less about USDA estimates/projections. To me the real story of fundamentals is told in the analysis of futures spreads, as it reflects what the commercial (those actually involved in the underlying cash commodity) side of any market believes the true supply and demand situation to be.

So let's turn our attention to what we see in the spreads. If you take a look at the attached chart (weekly close only) you'll see a number of different colored lines. The heavier black line shows the trend of the January to March, the blue line is March to May, the green line is May to July, and the red dashed line the new-crop November 2015 to January 2016 spread. With just a quick look at the chart, what is the common theme of all these different spreads? Go ahead; I'll wait while you take a look.

Welcome back. Those that said these spreads are trending up (decreasing carry), give yourself a gold star. And what does a series of futures spreads with decreasing carry reflect? That's right: A more bullish view of fundamentals by commercial traders.

First the January to March, though I know January is in delivery and approaching its last trading day (Wednesday, January 14). Notice that the Jan/March is approaching its previous peak of a 3 1/2 cent carry (thin dashed line heading to the left side of the chart. This reflects an immediate need by merchandisers for cash soybeans, not surprising given ongoing strong demand (both export and crush) while available cash supplies are tightly held in cold hands. The 4 1/2 cent carry accounts for roughly 28% of total cost of carry, again reflecting a short-term bullish commercial view.

Things get even more interesting when we look at the deferred spreads. Remember that harvest of the expected record South American crop will begin in late February to early March, with much of the production set to move immediately into position for export. Yet the March to May spread is showing a carry of about 5 1/2 cents, approximately 35% of total cost of carry. At worst this is a neutral read of fundamentals for this key time frame, with 33% a rough border between bullish and neutral. Deeper into the 2015-2016 marketing year the May to July spread turns bullish again, with its 4 cent carry making up only 24% of total cost of carry.

If the spreads are bullish, and trending up reflecting an even more bullish commercial view, then what should we make of bearish WASDE report numbers next week.

Nothing. Time and time again USDA has shown it has no clue, or worse ulterior motives, when it comes to soybean supply and demand. Given what soybean spreads are telling us it would not be surprising to see the nearby March futures contract finally break through technical resistance near $10.60 3/4, a price that marks the 38.2% retracement level of its previous downtrend from $12.87 1/2 through the low of $9.20 3/4, setting its sights on at least the 50% retracement level near $11.04.

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Comments

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Fred Middleton
1/7/2015 | 7:28 PM CST
sorry call spreads
Fred Middleton
1/7/2015 | 5:11 PM CST
I have 2 - $11 - 11.80 put spreads should I hold tell after report or take even money