Posted by: usset001 | April 2, 2012

An analysis of soybean inverses and similar years since 1990

Since early February, soybean futures prices have risen steadily from $12/bu. to over $14/bu. in the July contract. Not surprisingly, the inverse from old crop (Jul’12) to new crop futures (Nov’12) has also increased, from a modest 5 cent inverse to over 40 cents today. On Friday, for example, the Jul’12 contract closed at a 50 cent premium to the new crop Nov’12 contract ($14.08 vs. $13.58).

Inverted futures markets in the soybean market are not rare but they are interesting. They speak to small stock levels or strong demand, or a combination of the two. I want to review the record for similar years in the soybean market (moderate to strong Jul/Nov futures inverses) since 1990.

Since 1990, I can identify 10 different years when the Jul/Nov spread was moderate or highly inverted. By a “moderate” inverse, I’m talking about years when the July contract was at a 3-8% premium to the November contract in early April (With Jul’12 at a 4% premium to Nov’12, this year would count as a moderate inverse). This includes the years 1994, 1996, 1998, 2005, 2008 and 2010. Highly inverted years include 1997, 2003, 2004 and 2009, when the old crop July futures were trading at a 10-25% premium to November futures in early April. I am not considering the years 2001, 2002 or 2011, when old crop/new crop spreads were slightly inverted, but essentially flat.

This analysis mirrors the analysis I did on corn market inverses in my Corn & Soybean Digest column of April 2011 (“Old and New-Crop Challenges”). I want to explore two questions concerning these inverted years. First, what does the inverted year say about new crop pricing opportunities? Second, when did old and new crop prices peak in each of these years?

Concerning new crop pricing opportunities, there is a well-established seasonal trend for November futures to decline from spring to harvest. November soybean futures traded lower from May 1 to October 1 in 15 of 22 years (68%) from 1990-2011. I call this as the second strongest futures price seasonal that I am aware of – topped only by the tendency for December corn futures to decline from spring to harvest (17 of the last 22 years).

Does this tendency increase or decrease in years where we have an old crop/new crop inverse? Of the 10 years studied with a moderate or strong inverse, 8 years (80%) traded lower from spring to harvest. The exceptions were 2003 and last year, both poor years for soybean yields in the U.S.

When did old and new crop prices peak in each of these years? As the review of years shows below, old crop futures (the July contract) usually topped out in May or June. The top in the new crop contract generally followed similar timing with the exceptions, of course, of 2003 and 2010.

Years with a Moderate to Strong Inverse from July (Old Crop) to the November (New Crop) Contract, 1990-2011

Year    July contract price peak / November contract price peak

1994                          mid June                    /                     mid June

1996                           mid May                    /                       mid Sep

1997                            FH May                     /           FH May & late Oct

1998                        late June                       /                  early May

2003                  steady thru June            /                      late Oct

2004                       early May                      /                   early April

2005                        LH June                         /                     LH June

2008                       late June                        /                     early July

2009                        FH June                        /             early June & FH Aug

2010                      LH April                          /                LH Apr & mid Oct

I see many analysts betting on  a drought in 2012. I’ll never say never but sufficient rains and conducive grain growing weather are what make the corn belt the Corn Belt.

Old crop/new crop inverses create tension – and a pricing opportunity.

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