PFA Pioneer Blog
Bull spreads are working in corn, soybeans
Mar 16, 2012
Pro Farmer Extra
- From the Editors of Pro Farmer newsletter
Another way to export corn
March 16, 2012
The grain markets had an impressive week (if you're bullish or still have some grain in the bin)! And maybe even more impressive than the flat-price gains were gains in "bull spreads." This spread is a long-nearby/short-deferred position. In corn and soybeans, a bull spread normally means being long old-crop and short new-crop futures, but a bull spread can be established in contracts representing the same crop year (long May/short July corn, for example).
And as the name suggests, a bull-spread market is a bullish signal for flat-price, as well. It indicates either strong demand for old-crop supplies or tight old-crop stocks. We included some spread analysis in this week's Pro Farmer newsletter and we thought we'd share it with you here:
"The bull spreading signals attitudes are bullish and there’s a 'pull' for old-crop futures, though for different reasons. For corn, the catalyst is tight old-crop supplies. While there is still corn in bins across the countryside, supplies are tighter than normal and much of what’s in storage has already been priced for deferred delivery. And producers who have old-crop corn that’s not yet priced aren’t willing to part with it at sub-$7 prices. At the same time, hopes of record production this year are capping the upside in new-crop futures. Result: The old-crop/new-crop spread is widening.
"Once corn priced for late-spring/early summer starts to actively move, the 'pull' on old-crop futures could decline some, but the tight stocks situation isn’t going to be alleviated until new-crop supplies are available. Therefore, traders should continue to actively bull spread corn through summer. The risk is bull spreads have widened sharply and “everyone” is long old-crop, short new-crop.
"For soybeans, strength in old-crop futures is tied to demand, particularly from China. Old-crop soybean supplies are abundant, but Chinese demand is keeping nearby futures in a leadership role on the price rally. The reason bull spreads haven’t run more aggressively is USDA is projecting a draw down in carryover for 2012-13. Because there are plenty of old-crop soybean supplies left to price, the market could face a sharp unwinding of bull spreads once China switches the bulk of its business to South America."
Also, we talked about the "forward curve" in corn and soybeans. Basically, this is just another spread analysis that looks at the "carry" in the market. "Carry" is incentive for farmers to put crop in the bin at harvest rather than moving it to market at harvest. For corn, March 2013 futures ended Friday at a 10-cent premium to December 2013 futures. That's 10 cents to store corn for three or four months. At 2 to 3 cents per month in storage costs, the market is offering some incentive to put corn in the bin. The carry out to May is about 16 cents and is about 21 cents to the July 2013 contract. If you've got on-farm storage, capturing that carry (selling for deferred delivery) is a good way to help pay for the bin.
It's a completely different story in soybeans. November 2012 soybean ended Friday a half-cent below January 2013 futures and are trading at a premium to March, May and July 2013 futures. That means there is no incentive to put beans in the bin. So if you're thinking about locking in some $13 2012-crop soybean prices, make the sales for fall delivery. The market is giving you incentive to move soybeans from the combine, to the cart, to the truck and to town at harvest.
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