Posted by: usset001 | May 29, 2012

The old crop/new crop inverse in soybean futures

Jul'12-Nov'12 (old crop/new crop) Soybean SpreadLast week I looked at the large inverse in the corn market from old to new crop futures. I want to follow that discussion with a look at the old crop/new crop inverse in the soybean market.

An inverted market occurs when nearby prices trade at a premium to deferred prices. The futures market in soybeans is currently showing a modestly strong inverse; the old crop (Jul’12) premium to the new crop contract (Nov’12) increased steadily from less than 10 cents/bu. in mid-February to 130 cents/bu. by late April. Over the past 5 weeks, the spread has traded in a wide and volatile range, currently trading at about 90 cents/bu.

Like my corn analysis, I examined years since 1987 when the July/Dec soybean spread (old crop/new crop) has shown an inverse in May. Old crop/new crop inverses are not uncommon in soybeans. In 14 of the last 25 years, the July contract has traded at a premium to the November contract (for the soybean analysis, I looked at the average spread in the first half of May). I focused on years where the inverse was modest to high, defined here as the July contract trading at more than a 2.5% premium to November. This definition includes 10 years – 1989, 1994, 1996, 1997, 1998, 2003, 2004, 2008, 2009, and 2010 (omitted “small” inverse years include 2001, 2002, 2005 and 2011). A few observations concerning these years…

From a fundamental standpoint, these were generally tight carryout years in the soybean market, or years marked by sharp declines in the stocks/use ratio from the previous crop year. Like 2012, some of these years displayed some very strong inverses. The July/November spread maxed out at over $1/bu. bushel in 1989, 1997, 2004, 2008, 2009 and 2011 (Jul’12/Nov’12 spread reached 131.5 cents/bu. near the end of April).

In most of these years (8 of 10), old crop values eventually declined with most of the decline occurring in July (and a few years spilling into August). Exceptions include 2003 and 2010, when prices increased over the summer months, and 1996 when the price collapse came in September/October.

New crop prices, as measured by the July contract, declined in 8 of these 10 years and, like corn, the decline from spring to fall was sharper than seen in “normal years.” The tendency for December corn to decline from spring to fall is the strongest seasonal tendency I know of, and the tendency for November soybeans to decline over the same period is, to my knowledge, the second strongest seasonal. Since 1990, the average decline for all years in soybeans was about 4% from May 1 to October 1. The average decline of November futures from spring to fall in the modest to high inverse years was 8%.

On May 1, Nov’12 soybeans were trading at $13.93/bu. An 8% decline in value would put it at about $12.85/bu. at harvest.

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