- Soya spike was supply driven
- Factors for the supply spike are not in place for next year
- Expect contango: soya spike caused curve to steepen - this will get priced out over time
- Though the spreads have already moved a lot there is more to come
________________________________________________________________________________
The soya market seemed to be overextended when looked at basic principles of commodities: if there is a price spike due to demand pull factors then this leads to sustained rallies, but supply shocks typically are short-lived. Since the latest rally in soya driving prices to about 1800 was caused by a supply shock in the form of a drought we thought it wise to analyse what chances there are of a repeat event next year. Let us first note that the drought that caused these rallies occured both in the US and in Latin America in the same year. This is a very rare event indeed. Here are the numbers: Our analsysis is based on general drought condition measured by percipitation and some other factors. The main result is that the probability of a repeat event like this year is below 7% for next year.
Given that world economic growth is not going to be staggering with Euroland having negative to flat growth, the USA perhaps 1.5-2% (given a base case outcome to the fiscal cliff issue) and China growing around 7.5-8.5% (ie similar to this year). We can expect demand growth to stay constant or be slightly reduced from this year.
Looking at the supply side we see that a) Latin America even in its most bearish case will have more production than this year. In fact normal (that is to say average) weather would create a crop of nearly 22% more than in early 2012. Given the unlikely event of drought being avoided in the next 12 months probably in both the USA and Latin America, with higher production rates in both regions we should see substantail supply increases without demand offset. And this does not even take into consideration the acreage re-allocation that takes place whenever a commodity experiences a price spike (higher prices tend to cure higher prices by increasing supply and reducing demand). One has to expect that this year's supply issues will be avoided.
Given the above we can expect soya prices to be substantially deflated from current levels. However, due to the volatile nature of softs one may prefer to express such a view in the safest possible area where vol is much lower and risk-reward profiles look better. One may do this by selling spreads within next years crop season.
Looking at the curve structure one can notice that some areas of the curve that fall within the same harvest period were too steep, trading in backwardation as the front rally for this year had influenced the forward curve for next year. One might reasonably expect the curve to fall into contango and hence expect spreads like the july - nov 2013 to narrow further.
Disclaimer: This posting is for information purposes only and is not intended as an offer,recommendation or solicitation to buy or sell, nor is it an official confirmation of terms. No representation or warranty is made that this information is complete or accurate. Any views or opinions expressed do not necessarily represent those of Archbridge Capital AG. This information is not intended, tax or legal advice. You also acknowledge that the information should not be construed as a solicitation or offer by Archbridge Capital AG to buy or sell any securities or any other financial instruments or provide any investment advice or service. Unless otherwise stated, any pricing information given in this posting is indicative only, is subject to changes and does not constitute an offer to deal at any price quoted. You should be aware that returns can be volatile and you may lose all or a portion of your investment. Past performance of any investment or trading tool is not necessarily indicative of future performance or results.