What is the Big Move in Soybean Spreads Telling Us?
Jun 05, 2014
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Soybeans have been under pressure in the last two weeks with most of the pressure starting in the new crop November contract. Until recently the old crop July contract had been reluctant to come down, but in the last few days has begun to catch up. What does this move in the old crop - new crop soybean spread tell us?
Both July and November soybeans put in their current high on May 22nd. Since then old crop July soybeans are 74 cents off of highs while the new crop November soybeans ar3 69 cents off of highs. From a pure amount basis these numbers are pretty much the same, but from a percentage basis this is a much bigger drop in new crop November soybeans. From a fundamental point of view this would make a lot of sense as the fundamentals for new crop November soybeans are quite bearish while the fundamentals for old crop July soybeans remain bullish. However, the way this spread has held up during a move to the downside goes against what we would expect spreads to do in a move lower.
Weakness in the soybean complex began with the new crop November soybean contract. With the USDA projecting a massive soybean crop this year and some of the largest soybean stocks we have seen in recent history the fundamental set up for new crop November soybeans has widely been seen as a bearish set up. However, planting delays had the market questioning the potential for the USDA's projections. But, once we were able to get more then 50% of the soybean crop in the grown pressure started to build and has continued to build as planting has rolled along smoothly. In the mean time old crop July soybeans had been reluctant to come down due to continued concerns about the tight US supplies from now until harvest.
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Today the old crop July contract made a big push to play catch up with the July-November spread coming in 15 cents. The question is what does this mean? The answer could be twofold. For one this is more like what we would expect to see spreads do on a move lower. A bear spread is selling the front month, in this case July soybeans and buying the back month, November soybeans. Another factor that could be coming into play here is that while the new crop November contract has already broken some key technical support levels July is just beginning to now. This could have speculators looking to get out of long positions in old crop July contracts, but it also may mean that speculators are now looking to get out of bull spreads which could add some temporary support to new crop November contracts.
Spreads have been a favorite of speculators in the soybeans lately as they offer lower margin requirements and can mean less risk in volatile markets. It seems likely that many speculators, large and small may have used bull spreads (bought July and sold November soybeans) to gain access to the long side of the bullish old crop soybean story. Now that this spread is coming under pressure it could be suggesting that soybean prices as a whole could be positioned to go lower from here. It could mean that we will see more unwinding of bull spreads in the soybeans which could put a significant amount of pressure on July soybeans. And, since the July contracts have been the strength in the soybean complex it could mean that the complex as a whole is positioning to move lower. It also means that speculators could choose to bear spread the market and sell July and buy November soybeans but we see this as being less likely given the bearish fundamental set up in the new crop November contract.
So, the recent activity in soybean spreads could be hinting at more downside in the soybean complex to come. Speculators are looking to get out of long positions ad at some point may look to get short. In the mean time you have a lot of interest from producers and commercials is selling the bearish new crop fundamentals. This could mean that the relative strength we saw in the new crop November contract may be short lived, but it also may give producers a little time to get some more sales made above the $12.00 level in November soybeans.
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July Corn Daily chart:
July Soybeans Daily chart:
July Wheat Daily chart:
All this means that speculators should be looking for opportunities and producers need to look to lock up some prices. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.
In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!
Ted Seifried (312) 277-0113 or firstname.lastname@example.org
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