ABSR Research: Chart of the Day
The 90 day trade negotiations are assumed to “unofficially” end Feb 28, or effectively first notice day for the March 2019 futures contract. This puts the soybean Mar19-May19 futures spread squarely into focus as the deadline date could ultimately be the pivot point if a deal in not reached sooner. This spread is already steeper (more negative) than by recent historical standards but could move steeper each day a deal is not reached and the deadline nears. By contrast, a deal if done soon would be expected to flatten the forward curve so long as it were to include “immediate” actions. My personal feeling is ultimately a deal will be reached…but only after considerable posturing from both sides and some ugly whipsaw markets for the next several weeks. Selling the spread (Sell Mar19 & Buy May19) has an attractive risk reward profile, especially for holders of the physical commodity. Our chart of the day shows the spread today in comparison to last year and the four year average. Risk of this spread narrowing back toward the average (-6 to -8 cents) is certainly possible, but not probable given that any deal is likely to have a lag effect. In addition, if an agreement were made soon, it would benefit soybean prices outright. On the flip side, the longer trade negotiations are prolonged the more likely lower prices will prevail and the curve steepen (become more negative). The are also calendar option versions of this position that may be equally attractive.
Shawn Bingham, CAIA
Source(s): ABSR Research, Commodity Systems Inc.
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