Posted by: usset001 | May 24, 2010

What makes a true bear market in soybeans?

I received a very perceptive comment and question from a reader.

“Given that the SN0 – SX0 [July-November 2010 soybeans] spread has risen while the outrights [futures prices] have declined over the last three weeks, does that suggest that the outrights a have little rally coming soon? Is this an appropriate analysis of the spreads?”

I commend you for a keen eye – you have spotted diverging signals from flat prices and spreads in the soybean market.

We expect to see three different but related trends in a true bear market: (1) declining futures prices, (2) a weakening basis, or cash prices falling even faster than futures prices and, (3) widening carrying charges (or decreasing inverses) in interdelivery spreads. Over the past four weeks, July soybean futures declined about 70 cents per bushel, from $10.10 to $9.40 per bushel. As you note, however, the July-November inverse increased from 20 to 34 cents from early May to Friday, May 21. Basis is also improving (a bullish, not bearish, signal). For example in Des Moines, the nearby basis has increased from 27 cents under to 12 cents under in the past three weeks. Ditto for the basis in Jackson, MN, increasing from 55 under to 39 cents under the July contract.

What should we make of these diverging signals? First note that diverging signals of this sort are not rare, particularly over a short period of time (several days). But you’ve identified a divergence of signals over a period of nearly one month, and that is not very common. I believe that in assessing the true tone of a market, seasoned grain traders would place a greater weight on the indications from the cash market (stronger basis) and carrying charges (increasing inverses) than from the futures market. For me this is the bottom line: I will not buy into (maybe I should say “sell into”) the bear market until I see a weaker tone to basis and a softening inverse to match declining futures prices.


Responses

  1. […] late May I posted comments on the bear market in soybeans. I made the point that a true bear market should reflect three trends: (1) declining futures […]


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