There are two significant market signals which indicate that the bull market in soybeans is about to take a rest. Farmers who have been paying attention to those indicators have been busy tidying up their soybean marketing programs; everyone else needs to get fairly serious about catching up.
The first of these market signals is that the futures spreads have started to collapse. “Spreads” are the price difference between the various futures month’s price levels. When futures prices are continuing on a trend, the spreads between the series of futures contracts tend to stay the same. However, when the highest months can’t get any higher, or the lowest months, can’t get any lower (indicating that the market is losing momentum in its movement), then the price trend is about to reverse. In the past two weeks, the spread between the old crop May futures and the new crop November futures has closed in by $0.20 cents. With the top-priced months in the futures rally failing to hold the momentum, it is a fairly good indicator that the market’s fortunes are about to reverse.
A good metaphor for this is to picture the flight path of an arrow which was shot upward. For the first portion of the arrow’s flight, the point of the arrow is higher than the feathers on the arrow’s tail. As the feather’s altitude catches up to the tip’s height, the arrow is leveling out and about to head lower. Although the physics of flight trajectory and the spreads in futures values are not scientifically connected, the example remains true. When the highs can’t lead the market higher, the whole complex is about to tumble.
The second signal is the seasonal trend. Statistically, soybean futures prices rally in January and February, and fall in March. In practical terms, this means that the market worries about growing conditions, like rainfall, drought, insects and disease during the Southern Hemisphere growing season, and then relaxes as the crop matures and gets harvested in March. The fundamentals of South American production are under-pinned by the buying of acreage in North America during the same period. As Brazil and Argentina harvest what is expected to be a record 112 million metric tonne soybean crop this spring and North American soybean planting expectations sneak up to over 83 million acres (Canada and United States combined), there is no doubt that the world’s soybean supply fears will ease from what they were last fall, and the typical seasonal dip may be even more pronounced in 2014.
Without a doubt 2013 crop soybeans are scarce in the Eastern Canadian market, and both futures and basis have rallied enough to reward the farmer for his patience in holding them since harvest. But while basis levels could still stay strong, the futures component of price is global in nature and even if there were no soybeans left in central Ontario it would have no impact on CBOT values. There are already new crop Brazilian soybeans coming into the United States as far north as Wilmington, SC. And although they might not make it as far as Canada, the point where South American soybeans make it into the North American market is certainly the price point where soybeans start flowing over the dam.