Is Soybean Basis in Overs?

• The National Soybean Index (intrinsic value of the soybean market) got within sight of its long-term downside target in mid-July, correlating to higher available stocks-to-use. 
• New-crop futures spreads continue to cover a neutral-to-bullish level of calculated full commercial carry, while the old-crop August-September is as useless as ever. 
• National average basis is a mixed bag, with Tuesday evening showing the NSI price above both the September and November futures contracts.

As I’ve said before, when it comes to the soybean market we lose two out of our three reads on real fundamental when the calendar page turns to July, only to return again as the sun sets on August when the summer quarter comes to an end. If you recall, the three reads I’m referring to are the National Soybean Index (national average cash price), basis (relationship between the cash index and the futures market), and futures spreads. It is understanding these three reads that give us an advantage over the rest of the industry that stands in line to receive government manna in the form of weekly, monthly, and quarterly USDA reports.

Let’s start with the fundamental read we still have: the National Soybean Index (ISY00). This past Monday evening (July 15), the NSI was calculated near $10.37, down nearly 60 cents from the end of June calculation of $10.93. Recall from previous discussions the long-term downside target for the NSI (monthly close only chart), based on the completion of a head and shoulder top pattern at the end of April 2023, is near $10.26. This means the NSI had moved to within roughly a dime of its long-term target by mid-June, with the seasonal low weekly close tending to occur the last week of September. In other words, the NSI still has an average 2.5 months remaining in its seasonal downtrend. What does this mean from a fundamental point of view? The NSI priced near $10.37 put my available stocks-to-use calculation at 13.7% as compared to the end of June figure of 11.8% and July 2023’s 5.8%. That is a substantial change in the supply and demand relationship as the US heads toward its next harvest. 

Seasonally, we can toss out the remaining 2023-2024 marketing year August-September futures spread because it uses – well – the August and September futures contracts. The best characterization I can come up with for these to contracts is to call them the Jar Jar Binks of the soybean market. Those of you who grew up watching the Star Wars movies will easily make the connection. But for others who don’t understand the reference it means something that is A) an unnecessary attempt at comic relief and B) infinitely annoying. The bottom line is either or both contracts make old-crop futures spreads unreadable. That’s not the case for new-crop, though, where we can continue to track spreads starting with the November-January. I continue to track the 2024-2025 contracts (except anything having to do with Aug25 or Sep25), and the bottom line is futures spreads are neutral (covering more than 33% calculated full commercial carry and less than 67%) to bullish (less than 33% cfcc). 

I want to spend some time talking about national average basis. To begin with, we can’t use our official daily or weekly calculations as long as the nearby futures contract is either August or September. However, I recall my days as a grain merchandiser in central Kansas many decades ago (and yes, soybeans were grown in that part of the world back then) and setting daily cash prices was a nightmare. Some of the buyers further up the line were bidding off August, some were using September (to this day I can’t figure out why), and others said to heck with it and rolled from July out to November. This is something I’ve always appreciated about the canola market: It doesn’t have Jar Jar Binks in the contract lineup, with July immediately followed by November. 

This past Tuesday evening (July 16) made the US soybean national average basis market even more interesting. The NSI was calculated near $10.48 while the futures market closed like this: 

• August was priced at $10.9050, up 12.5 cents for the day
• September was priced at $10.3775, up 4.0 cents for the day
• November was priced at $10.4325, up 3.25 cents for the day

I’m sure you can see what this did with basis calculations: 

• 42.0 cents under August
• 10.75 cents over September
• 5.25 cents over November

That’s right, not only was the August-September futures spread showing an inverse of 52.75 cents, but theoretical basis calculations versus September and November were in overs. As I talked about a couple years ago in the corn market, basis in overs reflects a bullish short-term supply and demand situation. In this case, though, national average basis versus the August issue remains neutral while the NSI tells us available stocks-to-use are incredibly bearish. 

With our three fundamental reads giving us three different views of real fundamentals (NSI bearish, basis neutral, futures spread bullish), what can we believe? Again, if we throw out anything to do with the August and September futures contracts, we are left with the intrinsic value of the market, the NSI. 

All that being said, we need to keep an eye on the NSI and Nov24 futures (ZSX24) as we make our way toward the end of August. A couple years ago, the first weekly close of September had national average basis at 18.75 cents over November futures. It should be noted, though, by the time we got to the end of October 2022 the basis calculation had fallen to 45.0 cents under November. 

On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.