Canada Markets

Speaking to a crowd at the Wild Oats Grainworld conference a few months ago, DTN Senior Analyst Darin Newsom suggested that if a person had but one chart at his disposal to gain a better understanding of the market, the forward curve for any given commodity would be the one. He called it the Reader's Digest version of the overall market, while today's chart of the forward curve for soybeans could be compared to viewing consecutive Reader's Digest issues over a six-month period.

The forward curve simply plots the price for each consecutive futures contract and runs a line through them. For example, today's July soybean close was $15.27 1/4 per bushel, while the August close was at $14.49 3/4/bu., the September close was at $13.55 1/4 and so on. Each of these prices is plotted on a chart by lining up the contract month on the x-axis with the appropriate price on the vertical y-axis.

Newsom would summarize this line as the market's view of soybean fundamentals. An upward sloping line would suggest a carry market, where each subsequent contract is higher than the one before it. This is a bearish market as buyers are sending the signal that they don't need your product now, and in fact will pay you more if you should carry the product forward to some point in the future.

A downward-sloping line, such as we're seeing in the attached soybean chart, represents an inverted market, where nearby contracts trade at higher levels than distant contracts. This is a bullish market, with the buyer sending the signal that he wants your product now, and will pay you more for it now than in the future.

I thought it would be interesting to look at the change in the forward curve for soybeans over the past six months. As you can see, the flatter brown line, which represents the forward curve on Jan. 1, which really represents little more than a snapshot in time, has evolved over time to the current curve, represented by the pink line. This line is much steeper in slope, representing a more bullish situation.

For example, the closing spread between the July soybean contract and the November contract closed at $2.21 1/2/bu. in today's trade. This can be viewed as a measure of the relative value of old-crop soybeans as compared to new-crop supplies in November. Should old-crop supplies continue to tighten, forcing the July higher relative to the new crop prices, this move will be reflected in a forward curve that becomes even steeper than the pink line shown.

Using DTN's National Soybean Index as a measure for the cash market for U.S. soybeans, we see the Jan. 2 index was at $13.75/bu., while the June 6 index closed at $15.13/bu. The bullish situation as seen in the evolution of the forward curve over the past several months has certainly translated into a much stronger cash price, an example of the practical nature of this tool.

Cliff Jamieson can be reached at cliff.jamieson@telventdtn.com

(AG)

© Copyright 2013 DTN/The Progressive Farmer. All rights reserved.