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The spreads know, SoyRoy says

06/23/2013 @ 9:40pm

One of the things we have tried to teach in the workshops sponsored by the Nebraska Soybean Board is that the spreads between the various contract months can be an indicator as to the future direction of prices. Specifically, if spread between the December corn futures and the following July corn futures is wide in favor of the deferred contracts, odds are good that prices will head lower. A spread between the two contracts of 25 cents would be considered normal. In recent years that spread has been as high as 40 cents.


If the spread between December futures and July futures is small or December is higher than July, that is a positive sign. Odds are good that prices will go up or stay up if they are already high. When futures prices go up more in nearby contracts than in deferred contracts, it is referred to as bull spreading. If the spread goes the opposite in those two months, there is a good probability that prices will head lower in the future. These are general guidelines, of course. They can go opposite directions in the same week or even on two consecutive days.

 

That situation occurred in both the soybean and corn markets in the past week. When that happens, making predictions of price direction is very confusing. Adding to the confusion is the fact that in any location cash bids will be based on different contract months. Here in eastern Nebraska, June cash bids are normally based on July futures for both grains. However, my local elevator changed its basis on soybeans to the August contract to avoid the possible volatility that might come with the expiration of the July contract. Most corn bids are still based on July futures. But at least one terminal in the area is basing offers on September futures.


If this confuses you, don't feel bad. The most important thing is still the flat price being offered on any given day. Basing price predictions on spreads or basis has about the same probability of success as any technical system or weather forecast. The above ideas are simply guidelines that may help you make a decision about when to sell.

 

On a related note, I heard on the radio this morning that the all-time high temperature for June 20 was 104 degrees in 1974. That was the beginning of the worst drought at my farm since the 1930s. With planting long since over on my farm and the planter put away for another year, I guess farmers in this area need something to worry about. With the amazingly quick change in weather in 2012, I think we will all sleep better when we see a weather forecast that does not include temperatures in the 90s for a week. 

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