Canada Markets

Soybean/Canola Spreads Diverge

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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Soybean spreads are charting a different course than canola spreads. Soybean spreads are indicating a short-term bullish view of fundamentals, with the Jan/March inverted and the Mar/May trading at a weak carry. Canola spreads weakened this week. (DTN graphic by Nick Scalise)

In today's Newsom on the Market blog, DTN Senior Analyst Darin Newsom asks the question if the soybean market is bullish or bearish. He responds by answering with a simple "Yes." It really depends on whether you believe in the fundamental data being released or whether you choose to focus on the signals coming from the market as to which side of the fence you are on in this issue.

Fundamental data is far from bullish. U.S. ending stocks are expected to increase by 143.5% to 465 million bushels this crop year (12.7 million metric tons), the largest volume since 2006/07, according to the USDA's December WASDE report. Ahead of Tuesday's January report, the average of pre-report estimates suugest this figure will increase by 7 mb to 471 mb.

While there are downgrades taking place to estimates for the Brazilian crop, it appears that a record crop will still be achieved and the weak currency in that country will force these supplies onto world markets. A recent USDA attache report indicates that Brazilian farmers had sold 50% of their current crop as of late December, as compared to 26% at the same time last year and a longer-term average of 40%.

As well, current estimates suggest that the U.S. will seed more acres in 2016, which could further add to the stocks which are weighing on the market.

Then there's those "pesky" futures spreads, as describe by Newsom. Soybean's futures spreads, an indication of the market's view of fundamentals as determined by the actions of commercial traders, or those closest to the physical product, are reflecting a short-term bullish situation despite the bearish fundamental data described. The January/March spread ended at an inverse of 14 1/4 cents, while the March/May spread narrowed this week to a weak carry of 2 3/4 cents, also nearing an inverse. Another bullish signal (not shown) is seen with a bullish outside reversal signal in Wednesday's trade, the third such signal seen since late November.

Perhaps it's early to grasp just what this means. A lack of producer selling? Lack of faith in projections for Brazil or a lack of confidence in USDA forecasts? Newsom compares the mixed messages coming from the soybean market to the New Orleans culinary favorite gumbo: "Is gumbo of Creole of Cajun descent? Is it a soup or a stew?"

Given the mixed signals coming from the soybean market, perhaps it's no wonder that canola is also struggling for direction. As seen on the attached chart, the March/May and May/July canola spreads moved sharply weaker this week, counter to the move seen in soybeans, indicating an increasingly bearish view of fundamentals held by commercial traders. This comes after these same spreads narrowed over the month of December despite a sharp increase in Canada's 2015 production estimate released by Statistics Canada in early December.

The market also struggled for direction late in the week, with Thursday's $8.10/mt loss plunging below the support of the March contract's 50-day, 100-day and 200-day moving averages, only to retrace on Friday to close above each of these support levels.

Given the uncertainty, the March contract has traded within a $31.70/mt range over the past 21 weeks, with this week's close just above the mid-point of the range, as we enter into canola's period of seasonal strength.


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