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 email@example.com
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