Soybeans: A Strong Case for Weather Derivatives

• The easiest way to understand a market is to look at its structure. In soybeans, noncommercial and commercial traders are buying heading into the weekend. 
• Much of this is due to weather, because as I've long argued, ag futures markets are weather derivatives at heart. 
• We need to keep in mind mid-December in South America is the equivalent of mid-June in North America. 

The soybean market is off to a thundering start Friday with the more active (based on open interest) March issue gaining as much as 21.5 cents within the first two hours of trade, posting a high of $12.9675. Not only that but the March-May futures spread has cut its carry to 4.50 cents, covering 22% calculated full commercial carry (cfcc) with 33% or less considered bullish. Given what we see in the soybean market at this point Friday, what do we know about the soybean market? 

• The March futures contract (ZSH22) has rallied 53 cents off this past Tuesday’s low and 32 cents off Tuesday’s close.
  • Based on this, we know at least some of the buying is coming from noncommercial traders as they continue to add to their net-long futures position. 
  • The intermediate-term trend on March soybeans’ weekly chart is up, with a move beyond the previous 4-week high of $13.00050 likely to trigger another round of buying. 
  • But why is this group becoming a more active buyer? To Watson, it’s Fundamental. 

• The March-May futures spread has trimmed its carry from 8.5 cents at this past Monday’s close to Friday’s 4.5 cents. 
  • This tells us commercial traders are also buying, pushing the nearby contract versus the deferred.
  • Given mid-December in the Southern Hemisphere is the equivalent of mid-June up North, soybeans (and corn) could be considered already in the throes of an early summer weather market. 
    • This means some of Friday’s move is WWW[i] Activity, and sure enough morning weather runs looked warmer and drier for both Argentina and Brazil. 
  • Strengthening the case once again for ag futures to be considered weather derivatives. 

It will be interesting to see how the different aspects of the soybean market (futures, futures spreads, national average basis) close Friday. 

[i] WWW Activity is Wraparound Weather-market Weekend Activity, meaning markets post a big move on Friday based on weekend weather forecasts and again on Monday as traders react to what actually occurred over the weekend.