Kub's Den

In the previous installment of Kub's Den, I unraveled 15 years of the historical seasonal tendencies of the new-crop corn market. Smashed altogether on one chart, the past 15 December corn futures contracts looked like tangled, multi-colored spaghetti. It wasn't until I identified statistical clusters of annual highs, corresponding to clear categories of annual corn production -- short crop years, normal abundance years, or supply crush years -- that the charts could be painstakingly sorted and arranged to show consistent seasonal patterns.

Then I promised to do the same thing for soybeans.

But from the start, I had my suspicions that it wouldn't be quite as easy to get results, and the results wouldn't be quite so neat, for everyone's second-favorite row crop. The beauty of the corn study was that it demonstrated that in "normal" years of typically abundant corn production, the futures market does indeed express the most risk premium at exactly the timeframe when the corn crop faces the most fundamental weather risk -- May, June, July.

That is, when the Northern Hemisphere's corn crop faces the most weather risk. The United States alone makes up 37% of the world's export market for corn (projected by USDA). Add in Ukraine and other Northern Hemisphere countries, and this half of the globe contributes well more than half of the corn shipments available for international trade. The CBOT corn futures contract, as a global benchmark for corn prices, is therefore naturally concerned with the Northern Hemisphere's crop risk.

Looking at the soybean market, however, the fundamental influence of South American production on global supplies is undeniable. Brazil and Argentina grow about half of the world's soybeans, but because so much of their own production gets exported, together they make up well over half of the supply available to international customers. U.S. soybean exports have only 35% of the market share.

When any given year's November soybean futures contract on the CBOT is expiring and expressing a price for the newly harvested supply in this country, the overall market is also looking southward and factoring in weather risk for the soybean seeds being planted in Brazil and Argentina.

If a normally abundant corn market tends to hit its highest price in mid-June when the U.S. crop faces the greatest production risk, then a comparable timeframe for U.S. soybeans would be late June, right before blooming. On the other hand, it would be mid-December or late January right before soybeans bloom in Brazil and Argentina, respectively.

The fundamental justification for seasonal highs is already getting spread out across three countries, each with different planting, blooming, and harvesting schedules, and that's without even addressing the broad range of planting and harvesting dates that can take place within each country. Just as the U.S. soybean acreage sprawls 1,300 miles from Louisiana to Minnesota, planted between early May and late June, so does the Brazilian soybean acreage sprawl 1,300 miles from Rio Grande do Sol to northern Mato Grosso, planted any time from mid-October to late December, with harvest already started and 4% complete at the end of January (see DTN's South America Calling blog by Alistair Stewart).

So I was surprised when the data from CBOT-traded soybean futures contracts actually seemed more heavily influenced by North American soybean timeframes than by South American timeframes. In years of normal abundance, like 2009 or 2015, the November futures contract tended to reach its highest level of the year in June (June 11, 2009, and June 30, 2015). The cluster of spring/summer highs in this type of year spread out any time from early May to mid-July, but the average I calculated was June 30. That's extremely similar to the seasonal pattern displayed by the new-crop corn market (average high of June 18), only adjusted a couple weeks later, just like the critical reproductive stage of an American soybean plant is typically a couple weeks later than the critical reproductive stage of an American corn plant.

In years when the soybean crops were short, like 2011 or 2012, the average date of the November soybean contract's annual high arrived on Oct. 1. That's uncanny because that's the exact same date as the average high for the December corn contract during short crop years.

I will note that the annual highs I identified for November soybean contracts were, as a whole, more spread out and less reliable than the clusters of corn highs I saw. The seasonal pattern for normal-abundance years -- and 2016 may turn out to be a year of normally abundant soybean production -- showed spurts of risk premium being priced in during the summer, then generally lower prices through the harvest. But, there were a few outliers when the contract's annual high hit during South American planting: Nov. 11, 2010, or Nov. 8, 2006, for instance.

I don't claim there's much statistical reliability in these 15 years of data, arbitrarily sorted out into categories of production abundance. In addition to that, I make all the same disclaimers I made about the corn seasonality study: This analysis was a study of historical data, not a prediction of future events. No one has independently verified my calculations, and I'm not recommending that anyone should buy or sell commodity futures or commodity options (or cash commodities) based on this analysis alone.

Most importantly, just knowing the historical highs for certain categories of years doesn't solve the eternal problem of figuring out what kind of weather year it will be. Nothing will ever solve that problem. There's no way to truly know, in February, how large the soybean crop on either continent will be, or whether it will feel like normal abundance or a shortage, or a sudden crush of supply.

But, overall, I feel the time I spent unraveling spaghetti-like charts has paid off. It turns out the soybean market really does display a seasonal pattern, and it really does care about the health and well-being of our American soybean plants -- almost as much as American farmers do.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

(AG/CZ)

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