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Movies and markets can move backwards

Agriculture.com Staff 06/13/2009 @ 9:23am

When cable and satellite TV became available a few years back, Sharon and I decided instead to subscribe to a DVD movie rental service. It allows us to decide what movies we want to watch and is considerably cheaper than the other choices.

The most recent movie to arrive is entitled "The Curious Caser of Benjamin Button". It is the story of an individual who was born an old man and gets younger as he ages. I have only watched the first half hour but I assume that when he dies he is a baby.

In the part I have watched everything works backward. Clocks run counter clockwise. News reels run in reverse. As I watched this develop, it struck me that there are some parallels between the current grain market and the story line in the movie.

The normal structure of the futures market is to have deferred contract prices higher than nearby contracts. This spread is called "carry". The carry in the market supposedly provides an incentive to store grain for future delivery. In most cases it will pay part of the costs of putting grain in the bin and taking it out later.

The current cash corn prices in my local elevator exhibit normal carry. The bid for immediate delivery is $4.00. For next month the price is $4.02. For August it is $4.06. New crop is quoted at $4.08. This spread is an indicator that available supplies of corn are adequate so there is an incentive to store and sell later.

The situation in the soybean market is quite different. The bid for immediate delivery is $12.11. For delivery after July 1 the bid is a nickel less. For delivery the last half of July the price is $12.01. This negative carry is sometimes called an "inverse" or inverted market. It is a disincentive to store. It tells the grain trade that buyers want soybeans now, not at some future.

This difference between a carry market and an inverse market does a pretty good job of predicting the future direction of prices. A small positive carry such as the current corn market normally predicts a downward move in prices. A negative carry such as there was in the soybean market in the fall of 2003 normally is a good predictor of a move higher in the price. That indicator has done a good job of predicting the current rally in the soybean market.

The curious situation that is now occurring is that the nearby bid for soybeans just keeps getting more positive. The local elevator is now basing bids on the August futures contract, not the nearby July contract. The cash bids are reflecting a positive basis which just keeps getting better.

At some point the trade will stop focusing on the demand for soybeans for immediate crush and the cash bids will drop. It is impossible to know when this will happen because it is so long before the new crop is available. However, it could come any time because of several factors other than the lateness of the season. Chinese buying could dry up. The value of the dollar could rally, thereby reducing demand from other importing countries. The unprofitability of the livestock industry could reduce domestic demand.

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