Soy Signals: What Spreads Are Saying

Kevin McNew

May 18, 2020

USDA’s May WASDE report provided few bright spots for soybeans. U.S. old-crop carryout was sharply higher, as poor export performance raised carryout estimates from 480 MBU to 580 MBU. Looking ahead to the 2020/21 crop year, U.S. ending stocks are expected to slip to 405 MBU on a strong recovery in Chinese soy purchases, which are pegged at 96 MMT, up from 82 MMT in 2018.

On the world side, South America supplies were trimmed for old-crop from 176.5 MMT to 175.0 MMT, but next year USDA expects another surge in soy output to 184.5 MMT. In part, the growing South America supply response is a sign of a free fall for currencies in Brazil and Argentina of late, which has helped push domestic soy prices in those countries higher. Of particular note is Brazil, where internal soy prices have surged nearly 30 percent since the start of the year. Meanwhile, U.S. prices have slumped 10 percent over the same time period.

With farmers in Brazil getting a strong signal to grow more soybeans in 2020, this is not only weighing heavily on U.S. prices today but also impacting U.S. futures spreads. Normally, spreads versus the new-crop November contract will increase to reflect cost of storage, but current spreads are only slightly positive or even negative. For example, the spread from November to March soy futures is 7 cents premium to November over March. Historically, we seldom see a reading of this spread this low at this time of the year. A positive spread is usually the norm, and it tends to bottom out in summer and move higher into harvest to encourage storage.

Here’s how FBN views this anomaly and how you should make marketing decisions:

  • Only four of the last 40 years have seen the Nov/March spread be negative at harvest. In all cases, these were years of severe U.S. soy crop problems. In other words, with a normal U.S. crop, we would expect this spread to return to a positive and more typical carry from its negative valuation.

  • Furthermore, the signal today to U.S. farmers is clear. A negative carry for soybeans and a strong positive carry for corn should have farmers offloading harvested beans to the market and holding corn in storage. This could further cause soy spreads to widen out.

  • Basis levels will also be impacted. New-crop quotes for harvest basis are early on par with January basis quotes, another anomalous circumstance of negative spreads.

  • For fall delivery beans, it makes sense to look at locking in basis today ahead of delivery. Conversely, if you do want to store beans without a positive carry, it would be prudent to lock in the deferred basis but wait to establish prices once the spread widens out.

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Kevin McNew

May 18, 2020