Posted by: usset001 | February 23, 2009

Mixed signals from the market Part 2: Soybeans

contrary-soybeans-11The soybean market, like corn, has been sending mixed signals since early January. On one hand, futures prices are clearly trading lower. March soybean futures are down nearly $1.75 per bushel since the first of the year. On the other hand, basis levels – an indicator of strength in the cash market – are trending higher. The spot basis in Des Moines started the year at 50 cents under the March. It ended last week at 22 cents under.

Mixed signals are not limited to basis. Carrying charges in the soybean market are also narrowing. The March/July soybean spread has narrowed steadily since the first of the year, from 22 cents to 7 cents. Narrowing spreads, or less positive carrying charges, are signs of a fundementally strong market.

contrary-soybeans-2How should we interpret these mixed signals in corn and soybeans? Signals will not remain mixed for long. Either basis and carry get the message from a lower futures market, or the futures market starts paying attention to the strength indicated by basis and carry in the cash market. I am reminded of an accepted wisdom in the grain trade; when cash and futures markets send mixed signals, pay attention to the cash market.

If you are looking for something to give you hope for higher prices in the months ahead, a stronger basis and narrowing carrying charges may be it.


Responses

  1. Ed,

    Is this the expected behavior in a deflationary environment? How many times in the past has this situation occurred?

    Regards,
    Michael


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