Grains –
Yesterday posted another very impressive performance for the soy complex while corn and wheat traded somewhat listlessly until the late stages of yesterday’s session. It of course begs the question, has anything changed recently that dramatically alters soybean price potential vs. corn/wheat? Well, on one hand I would make the case that at this point in the year soybean and corn/wheat prices really don’t need to have much to do with each other. Perhaps later this winter or spring we’ll see some focus on soy/corn price relationships into planting discussions, but before then there doesn’t need to be much of a correlation. Still, even with that in mind, the relative soybean strength is a bit puzzling.
I quite simply cannot find any normal fundamental justification for yesterday’s extreme price strength in the soy complex (inspections were a bit stronger than expected, but not that strong). Instead, I believe “outside” influences were the primary factor in yesterday’s trade. I believe there is a growing “investment” consensus that inflation will pick up going forward. I noted here previously that inflation is typically highly correlated to crude oil prices, and with crude oil taking off yesterday it was easy to spark an overall inflation-on sentiment in the market yesterday. The Bloomberg Commodity Index gapped higher with the combination of stronger crude and a weaker dollar, and commodities in general were off to the races.
At this point a reasonable question is…if this is general commodity-wide buying interest based on inflation, why is the effect so much more pronounced in soybeans than corn or wheat for example? I think the answer is index traders have learned their lesson on the damage the negative roll can have on performance.
Note the breakdown above, showing the spread between the spot and 1-year deferred futures contracts in several different ag markets. As you can see there is a significant negative roll when moving longs from the spot corn/wheat contracts to deferred contracts. The roll in the soybean futures is basically flat. You can also see in the YTD column that the carry in corn and wheat has actually worsened (for the index long) while in soybeans the carry has improved. So, if you’re a fund manager charged with beating the ag sub-index of the BCOM (or maybe GSCI) why bother putting longs in corn or wheat if your rules don’t require it? Instead, simply allocate your required long positions to the soy complex to cover your upside for benchmarking purposes and not worry about the negative roll effects in corn and/or wheat.
I should state that I’m somewhat over-simplifying this, as certain funds have different rules and requirements for their benchmarking…but the bottom line is that unless you have to have your indexed longs in corn or wheat you really shouldn’t bother with them in this sort of carry environment.
The first two charts below somewhat illustrate and support this thought process. The first chart simply shows the YTD performance of these 3 key ag markets. At the time of writing soybeans were up roughly 17% YTD while corn was down roughly 3% and wheat was down roughly 13%. The second chart shows the YTD relative change in index trader net positions. Here you can see index traders have added roughly 24% to their net soybean positions while their wheat position is up slightly and their corn position is actually slightly lower. It should also be pointed out that there are also “index type” of benchmarking funds that are counted in the MM category.
All of that being said….the third chart below is one that I have to admit I was surprised to see. YTD wheat futures aggregate open interest is up roughly 39% vs a 4% increase in corn and a 3% decrease in soybeans. Clearly, given the thought process above I would have thought soybeans would certainly be higher than that. However, it is worth noting that this chart is only looking at futures OI. It might be a very different story if we look at OI in terms of futures and options (delta). Still, I have to admit that I am somewhat puzzled that futures OI has not moved in a greater manner on this recent buying surge in soybeans.
If…that is a big IF…this analysis is correct, it certainly does open the door for some big relative-value plays down the road if/when some of this investment flow slows down and/or fundamentals change.
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