Bull Spread, But Not Bullish

March 12, 2013 01:01 AM

What Traders are Talking About:

* Bull-spread market, but... Old-crop corn and soybean futures are trading well above new-crop futures. That suggests market fundamentals and attitudes are bullish. However, recent price action has shown a lack of sustained buying interest in both markets, especially corn. That signals the bulk of the price strength in old-crop futures is due to tight supplies. While soybean demand is strong, traders anticipate a sharp drop in exports once South American soybeans start freely flowing onto the world market. In the case of corn, demand is sluggish. Meanwhile, expectations for a major rebound in production this year is weighing on new-crop futures and contributing to the bull spreading.

The long and short of it: The premium old-crop futures hold to new-crop contracts in the corn and soybean markets is more reflective of tight old-crop stocks than overwhelmingly bullish attitudes.

* China buying U.S. new-crop corn. Private firms have recently purchased around 600,000 MT of 2013-crop U.S. corn and are hoping the Chinese government will grant extra import quotas, according to trade sources cited in a Reuters story. The sources say large buyers, such as state-run COFCO, are still waiting on lower prices before buying U.S. corn. Meanwhile, state stockpiler Sinograin may begin to import corn after its stockpiling program is complete April 30 if it hasn't secured enough supplies domestically. Currently, the market price for corn in China is higher than the price Sinograin can pay for state reserves, limiting the amount of corn the firm is able to buy domestically.

The long and short of it: Chinese buyers see current U.S. new-crop prices as a "value" buy. The further prices slide, the more Chinese demand there's likely to be.

* ENSO-neutral to continue. The pickup in active weather across the Plains and Midwest has raised questions about whether a weather pattern shift is in the works. But the Australian Bureau of Meteorology expects ENSO-neutral conditions to persist into spring. The bureau says, "While it is known that predictions from dynamical models during the April through June period have lower skill, all models agree that an ENSO-neutral state is the most likely scenario for the next season."

The long and short of it: While there's been an increase in precip, there are no strong indications of a shift in weather pattern. The concern is a lack of subsoil moisture if/when conditions turn dry this summer.


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