July 15, 2019
USDA is resurveying Corn Belt growers, and the August WASDE report should give us a much better estimate of corn and soybean acreage. This will be an important report, as changes in planted acres will have a direct impact on expected crop production. Until these figures are released, let me give you something else to watch; corn and soybean spreads.
I’m talking about here intra-market spreads, or the price differences between futures delivery months of the same commodity (e.g. December and July corn futures, or November and July soybean futures). You might know intra-market spreads better as carrying charges. Carrying charges - or the lack of them - tell us about the bullish or bearish tone of a market.
Carrying charges can be positive or negative. Positive carrying charges - deferred futures prices trading at premium to nearby futures - are an incentive to store grain. Positive carrying charges are common during bear markets when grain supplies are large. Negative carrying charges are also called inverted markets. Market inverses – deferred futures prices trading at a discount to nearby futures – are commonly associated with higher prices and bull markets.
Is the market bullish or bearish? Spreads tell the story. We have seen nothing but positive carry markets in corn, soybeans and wheat over the past five years.
In the chart below, note how changes in the Dec’19-Jul’20 corn spread have mirrored price movements in the Dec’19 corn contract. As the flat price increased from mid-May to early July, the spread narrowed (i.e. the Dec’19 price rose faster than the Jul’20 price). The tone has changed in corn. A bear market with wide spreads dominated the first five months of the year. Carrying charges remain positive but they are clearly smaller.
So what exactly am I watching for? I want to know if positive carrying charges go negative, i.e. the spread inverts with Dec’19 trading higher than the Jul’20 contract. An inverted market would be a clear indication of a bull market. The last time the corn market inverted was during the 2012 drought.
The following soybean chart shows the same mirroring of prices and spreads, in this case the Nov’19 flat price and the Nov’19/Jul’20 spread. But there is a difference between corn and soybeans. Corn spreads are noticeably narrower than they were during the first five months of the year. Soybean spreads are not.
Following the July WASDE report, I read this headline; “Short Crop will Slash Record Large Soy Stockpile by One-Fourth.” “Slashing stockpiles” sounds like a reason to buy, but stepping down to the second largest stockpile in decades is hardly bullish. Soybean spreads are telling us that the market is less than impressed with planting and yield issues in the soybean market.
Watch the spreads – are they narrowing or widening? Carrying charges offer a quick glimpse into the bullish or bearish tone of a market.
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