US row crop futures saw some profit taking and fund money moving out of grains and back into stocks on the back of some good employment data in the States. An early session dip in the stock market allowed entry at a good level in the afternoon.
Back in Chicago grains both corn and soybeans were approaching technically over-bought so to see a round of light profit taking wasn’t a surprise. The weekly US crop progress report shows neither crop, corn or soybeans, in any kind of production pinch at present. The main price driver has been export demand not production issues for corn and beans. This does highlight an interesting scenario, Brazilian soybean basis, the difference between their cash price in Brazil and Chicago soybean futures, has reached an all-time low. US futures have moved significantly higher while Brazilian cash bids have not kept up, resulting in a sharp reduction in basis. Any canola grower here would be all too familiar with that after the last six months.
The correlations between US futures values and the value of the underlying commodity has been questioned many times in the past and as loose as it gets we still fall back to their futures market for some kind of misguided guidance. Take spring wheat futures for an immediate example. Last night we saw June futures slip 5.5c/bu, that’s not much, but cash prices for spring wheat actually rallied about 11.5c/bu. Now granted we usually see the difference the other way around but it still highlights the lack of correlation to cash markets.
In the future it will be imperative to make ourselves aware of basis but more importantly we need to understand arbitrage and how to convert those cash prices from around the world to a price we can benchmark off. Don’t simply rely on a US futures market as an indicator.