Crop and Price Outlook Illinois Soybean Association Soybean Summit March 4, 2013

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1 Crop and Price Outlook Illinois Soybean Association Soybean Summit March 4, 2013 Darin Newsom DTN Senior Analyst

2 Putting Together an Outlook Structure of the market Investment activity Market s view of fundamentals Volatility Basis How far and fast the market is expected to move Seasonal tendencies Trend (price direction over time) Seasonal tendency Seasonality Price What does market tend to do during particular times of year Where the price falls in longer-term range

3 Market Types

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5 Soybeans: Trend, Noncommercials, and Volatility

6 The Market s View of Soybean Supply and Demand

7 The Market s View of Soybean Supply and Demand

8 Brazil Production = 83.5 mmt Argentina Production = 53 mmt

9 Brazil Production = 83.5 mmt Argentina Production = 48 mmt

10 Brazil Production = 83.5 mmt Argentina Production = 45 mmt

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14 Soybean (Old-crop) Market Outlook What we know: The structure of the market is neutral to bullish. Seasonally the soybean market tends to rally 31% from its fall/winter low through summer high. A strong inverse in the old-crop forward curve and continued firm national average basis indicate bullish fundamentals both short-term and long-term. Do commercial traders think South American production is as large as projected? Outlook: The seasonal index would imply a high futures price testing the 2012 peak near $ This seems unlikely unless a problem arises with South American production. A target of $16.50 may be more realistic.

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16 The Right Tool For Soybean Situation? With the trend sideways to up and spreads long-term bullish, this market would be rated as a (1) or (4). Seasonally the market tends to trade sideways through mid-april before turning up through a summer high. Volatility is relatively high Basis remains strong. Possible strategy: Therefore the long-term outlook would be to be long cash. Previously sold bushels would create the equivalent of synthetic put position.

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18 The Market s View of Soybean Supply and Demand

19 Soybean (New-crop) Market Outlook What we know: The structure of the market is neutral to bullish. As with old-crop, the new-crop market tends to rally through mid-summer. Higher market volatility could limit buying interest unless futures spreads grow increasingly bullish. Outlook: Given the neutral to bullish market structure the market should see a seasonal rally. Drought remains a key issue, as well as carryover effects of South American production. Still, new-crop November soybeans should be able to test the $13.60 level. The contract high is up at $ /4.

20 What to do with new-crop soybeans? With the short-term trend sideways to up and the spreads indicating a bullish commercial outlook, the market could be rated a (1) or a (4). Seasonally the market tends to trend sideways through mid-spring, then rally through mid-summer Volatility remains relatively high, making options overpriced Possible strategy: Be long the cash market for now Incremental cash sales would establish synthetic put position Keep an eye out for possible changes in trend of futures spreads.

21 Corn: Seasonality of Futures

22 Corn: Trend, Noncommercial Activity, and Volatility

23 The Market s View of Corn Supply and Demand

24 The Market s View of Corn Supply and Demand

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26 Corn (Old-crop) Market Outlook What we know: The structure of the market is expected to turn more bullish. Seasonally corn tends to rally through mid-june, and with volatility low noncommercial traders could look at rebuilding their long futures position. Fundamentally, the futures spreads are also bullish reflecting the continued tight global supply and demand situation as well as strong domestic demand (along with national average basis. Outlook: Nearby futures tend to rally about 25% from winter low through early summer high. Using weekly low close of $6.80 projects a high weekly close of $8.50. It remains to be seen if the structure turns bullish enough to challenge 2012 high. A more realistic target would be $7.60 to $7.90.

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28 What to do with old-crop corn? With the short-term trend now up and the spreads (and basis) still indicating a bullish commercial outlook, the market could be rated a (1). Seasonally the market tends to move higher Volatility remains low, an invitation to renewed noncommercial buying interest Possible strategy: Long cash Making incremental cash sales during seasonal rally Long futures and or call options

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30 The Market s View of Corn Supply and Demand

31 Corn (New-crop) Market Outlook What we know: The structure of the market is neutral for now. As with old-crop, the new-crop market tends to rally through mid-june. Volatility low is also low meaning noncommercial traders could look at building a long futures position. Fundamentally, the December to March futures spread is trending sideways, with the carry reflecting a neutral to slightly bearish commercial outlook. Outlook: Given the neutral to bullish market structure the market should rally. Spillover support from oldcrop corn and the strong likelihood of a weather scare (drought again), the December contract could rally to $6.13 to $6.30 with an outside chance of testing its high of $6.65.

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34 What to do with new-crop corn? With the short-term trend now up and the spreads indicating a neutral commercial outlook, the market could be rated a (2). Seasonally the market tends to move higher Volatility remains low, an invitation to renewed noncommercial buying interest Possible strategy: Long put options Make incremental cash sales during seasonal rally

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