Newsom on the Market          05/17 09:55

   Not Just Another Frame 

   One week after USDA presumably put the final nail in the coffin for grains, 
soybeans are showing stronger signs of life.

By Darin Newsom
DTN Senior Analyst

   Last Friday morning in this column, I used the melancholy Eagles' song 
"Tequila Sunrise" to illustrate grains as they headed into what was expected to 
be another bearish round of USDA numbers. Despite market signals to the 
contrary, there was no escaping the fact that USDA was going to be bearish, 
almost had to be bearish, in order to keep some semblance of sense with 
previous report numbers. I concluded last week's early morning piece with one 
of my favorite song lyric lines, "It's another tequila sunrise, and this old 
world still looks the same, another frame."

   This Friday, though, the world doesn't look quite the same. Grain markets, 
led by soybeans, have stabilized and while not setting the world on fire with 
bullishness, look capable of establishing late seasonal rallies (soybeans and 
corn, normal seasonal rally for wheat). 

   It is well documented that agriculture since the 2005-2006 marketing year 
has been corn's kingdom with all other markets satisfied playing the role of 
serfs (No, not Smurfs. That's a different story altogether). However, 2013 has 
shown us that soybeans are more than willing to take the baton and run with it. 

   Since last harvest, the commercial side of the soybean market has continued 
to show an increasing concern about supplies. This is despite continually 
higher projections of South American production coupled with near-endless 
chatter of problems in China reducing demand. U.S. exports raced ahead of 
projected pace early in the marketing year and continue to hold a 5% lead on 
USDA's projected 1.35 billion bushel projection. The latest round of cattle on 
feed numbers showed more placements, meaning more demand for soybean meal 
through the summer. 

   Should the bullish turn in soybeans be viewed as surprising? Not for those 
watching the market closely. Back in March, I had the opportunity to speak at a 
meeting for the Illinois Soybean Association in Normal, Ill., concluding with 
the remark that if I had to choose one market to be bullish, it would be cash 
soybeans. It was logical to me given the strength of the inverse in the futures 
spreads and national average basis at that time. These market signals were 
indicating commercial traders were then having trouble sourcing supplies to 
meet demand, leading to the question of what would happen over the final few 
months of the marketing year. 

   As it turned out, cash soybeans haven't performed as well as expected, but 
are still up roughly 2% since early March. Looking ahead, it seems the largest 
part of the rally may be yet to come. All the components are in place for a 
late seasonal uptrend that could leave market bears and USDA enthusiasts 
running for cover. 

   First and foremost, the trend in the futures market is begrudgingly turning 
up. A look at the weekly chart shows the nearby July contract has finally 
pushed through technical resistance at $14.23, seemingly setting its sights on 
the next target of $14.68 3/4. Those familiar with my analysis will connect the 
dots that a move to an uptrend reflects increased noncommercial (speculative, 
investment, fund, etc.) buying interest, a move that should not be surprising 
given the low market volatility. Remember, because it reduces potential risk, 
investment traders like markets with lower volatility. 

   They also like bullish fundamentals. Market indicators show soybeans have 
plenty of the latter. Recently, the inverse in the July-to-August futures 
spread has moved to almost 75 cents (July over August), a new high for the 2013 
spread. Not to be outdone, the inverse in the July-to-November (old-crop to 
new-crop) futures spread has also taken out its previous high of $2.02, trading 
up to $2.13 early Friday. Last but not least, national average basis (DTN 
National Corn Index minus the July futures spread) has firmed to 51 cents over, 
as compared to the five-year average of 50 cents under and the five-year high 
of 32 cents under. This is all while the July futures contract continues to 
trade in the upper 20% of the five-year price distribution range. Remember the 
normal inverse relationship between futures and basis, with a stronger futures 
market usually resulting in weaker basis. 

   By all indications, soybeans are on the threshold of a short-supply spike 
that could last until early harvest of the 2013-2014 crop. USDA's magical math 
that continues to hold domestic ending stocks at 125 mb doesn't hold up to what 
is going on in the market, with the reality of the situation being the U.S. may 
actually be holding far less than 100 mb when all is said and done at the end 
of August. We'll never see it in a report, but then again we have to ask 
ourselves, does that really matter anymore?

   Darin Newsom can be reached at darin.newsom@telventdtn.com 


(AG/ES)

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