Let's say two futures traders, on May 29, 2018, when the intentions of the U.S.-China trade war became clear, both decided to take a trading position that would profit as the soybean market reflected its suddenly bearish export prospects.
Trader A simply called her futures broker and sold new-crop November soybean futures at $10.42 1/2 and was required to deposit $2,350 of good faith margin money in order to have 5,000 bushels' worth of exposure to downward movement in soybeans.
Trader B called his futures broker and directed a bear-spread trade: selling one January soybean futures contract at $10.45 3/4 and simultaneously buying one March soybean futures contract at $10.28 3/4. Because all soybean futures contracts are expected to move roughly up or down together at the same time, being simultaneously short in one month and long in another month theoretically limits a trader's exposure to outright up-or-down losses in the overall market. And the exchange only required Trader B to deposit $405 of good faith margin money to make that spread trade.
As of Wednesday, Aug. 29, Trader A's short futures position would have gained $2.08 per bushel, or $10,400 overall, as the price of soybeans fell. That's 4.4 times as much money as the margin she initially deposited. Trader B's bear-spread trade would have gained 30 1/2 cents per bushel, or $1,525 overall, as the spread between the January and March soybean contracts widened from a 17-cent inversion back in May, to a 13 1/2-cent carry spread today. That's 3.8 times as much money as the margin he initially deposited.
Both traders did well, both trades had their advantages, and both measures of the soybean market (the futures price itself and the carry spreads between futures contracts) reflected the same bearish story.
In the cash market, where basis bids are 20 cents or 30 cents weaker than usual all across the U.S., that weakness extends all the way through the spring of 2019, so the carry spreads on the cash market are similar or even more bearish than the carry spreads seen between futures contracts.
For instance, a January cash soybean bid of 65 cents under the January futures contract (flat price: $7.82 Tuesday) is 39 cents away from a November cash soybean bid of 90 cents under the November futures contract (flat price: $7.43 Tuesday).
It costs money to store soybeans -- handling them, pumping air into bins, losing some of their volume to shrink, and if nothing else, deferring the income from one month to the next. But that example of 39 cents of carry in the cash market between harvest and January 2019 represents 19 1/2 cents per bushel per month that the market will reimburse soybean owners if they keep the soybeans locked away in a bin and off the market. That's the mechanism of how wider carry spreads reflect supply bearishness in a market.
So neither futures Trader A nor futures Trader B were the ones who may receive the most benefit from correctly positioning themselves in the soybean market. Rather, it's the commercial traders -- the ones with real warehouses, bins, elevators, bunkers and piles -- who can take advantage of the large upcoming crop, as long as the trade war continues and soybeans continue to lack a clear export destination.
That's true for farmers as well as for elevators, if the farmers have short futures hedges that they can roll forward to collect the cash in their brokerage accounts: the 27 cents of carry between the November 2018 and March 2019 contracts, for instance.
The anticipated returns for storing soybeans eventually start to diminish as the 2018-19 marketing year wears on, however. The futures market will pay a soybean owner about 6.7 cents per month to keep those soybeans off the market through March 2019, then still over 5 cents per month through July 2019, but only 1.8 cents per month to keep the soybeans locked away past July and into the next marketing year.
Perhaps the market is reflecting a belief that strong global demand will ultimately work its way into the U.S. soybean inventory ... eventually.
It certainly suggests there's not much more room for a bear-spreading strategy to play out beyond how wide the spreads have already grown, and instead, there's potential for an extremely quick reversal if our soybean export prospects ever get normalized.
Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at firstname.lastname@example.org or on Twitter @elainekub.
© Copyright 2018 DTN/The Progressive Farmer. All rights reserved.