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- The easiest way to understand a market is to look at its structure. In soybeans, noncommercial and commercial traders are buying heading into the weekend.
- Much of this is due to weather, because as I've long argued, ag futures markets are weather derivatives at heart.
- We need to keep in mind mid-December in South America is the equivalent of mid-June in North America.
The soybean market is off to a thundering start Friday with the more active (based on open interest) March issue gaining as much as 21.5 cents within the first two hours of trade, posting a high of $12.9675. Not only that but the March-May futures spread has cut its carry to 4.50 cents, covering 22% calculated full commercial carry (cfcc) with 33% or less considered bullish. Given what we see in the soybean market at this point Friday, what do we know about the soybean market?
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- The March futures contract (ZSH22) has rallied 53 cents off this past Tuesday’s low and 32 cents off Tuesday’s close.
- Based on this, we know at least some of the buying is coming from noncommercial traders as they continue to add to their net-long futures position.
- The intermediate-term trend on March soybeans’ weekly chart is up, with a move beyond the previous 4-week high of $13.00050 likely to trigger another round of buying.
- But why is this group becoming a more active buyer? To Watson, it’s Fundamental.
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- The March-May futures spread has trimmed its carry from 8.5 cents at this past Monday’s close to Friday’s 4.5 cents.
- This tells us commercial traders are also buying, pushing the nearby contract versus the deferred.
- Given mid-December in the Southern Hemisphere is the equivalent of mid-June up North, soybeans (and corn) could be considered already in the throes of an early summer weather market.
- This means some of Friday’s move is WWW[i] Activity, and sure enough morning weather runs looked warmer and drier for both Argentina and Brazil.
- Strengthening the case once again for ag futures to be considered weather derivatives.
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It will be interesting to see how the different aspects of the soybean market (futures, futures spreads, national average basis) close Friday.
[i] WWW Activity is Wraparound Weather-market Weekend Activity, meaning markets post a big move on Friday based on weekend weather forecasts and again on Monday as traders react to what actually occurred over the weekend.