Are soybean spreads doing their job? 

(MENAFN - Arab News) Soybean prices for immediate delivery recently scaled all-time highs on fears of supply depletion after hostile growing conditions slashed US production potential straight after South American growers suffered output setbacks of their own.

But usage rates are as much governed by price spreads as they are by outright price levels, and the recent sharp widening in 2012 to 2013 soybean spreads suggests end users have a strengthening incentive to postpone purchases for as long as possible even after the recent steep pullback in nearby prices.

There's been lots of excitement lately about how corn and soybean prices in the US have surged to all-time highs as hot and dry conditions devastated crops across the Midwest. And an equal amount of fanfare has surrounded the steep pullback in crop values lately as waves of profit taking and liquidation hit a slew of commodity markets.

But for end-users of the commodities in question, outright price levels are less important than the price differential between nearby and deferred delivery slots, as those spreads serve to indicate the varying levels of scarcity or abundance of the crop in question at certain points in the delivery calendar.

In the soybean market, some of those spreads have recently widened to all-time highs to reflect the stark difference in the amount of supplies available for immediate consumption versus at various points throughout 2013 when fresh supplies are due to surface.

The difference between the price of US soybeans for the post-harvest slot (tied to November 2012 soybean futures) and the price for soybeans available for March delivery is more than 1.30 a bushel, as fears of a potential US production failure ensure nearby soybean prices establish and hold a steep price premium over soybeans prices tied to later delivery periods.

That price differential is even larger versus July 2013 soybean prices, and greater still versus November 2013 levels as market participants anticipate increased supplies being available over the course of next year as South American growers - followed by their US counterparts - see rebounds in output totals following this year's drought-driven hiccups.

The fact that the price spread between nearby and deferred soy values widens the farther out you go on the delivery calendar ensures consumers get a clear message that there is an incentive to delay purchases of soybeans by as long as possible.

Indeed, even in the wake of the recent steep pullback in soybean futures prices, price spreads have remained fairly sturdy to reinforce the notion that it is the relationship between prices - not the price levels themselves - that are the key factors for consumers to watch going forward.

Following the recent aggressive pullback in soybean prices, it is tempting to think that this market has completed its job of warning of a potential shortage of 2012 soybeans should US growing conditions remain hostile through the remainder of the soy plant's growing season.

Or to put it another way, consumers should have heard loud and clear by now - from the 4 per bushel difference between November 2012 and November 2013 soybean prices - that aggressive postponements to soybean consumption will be rewarded.

However, the threat of a critical shortage of soybeans in the US this year is very real following the steady deterioration in US soy crop ratings in recent weeks as hot and dry conditions withered planted across the Midwest.

The US department of agriculture has already reduced soybean stocks projections to their lowest level in eight years, and additional inventory cuts are likely in the months ahead if field conditions remain as they are to inhibit plant development.

- Gavin Maguire is a Reuters market analyst. The views expressed are his own.

Should crop conditions worsen as expected, projected stocks could quickly decline below the psychologically significant 100 million bushel mark which may spark a bidding war among commercial users of the oilseed over the following weeks.

Such a bidding war would not only feature oilseed crushers based in the US, but could also potentially include the countries such as China, which have a well known dependence on soy imports and who are still reeling from the sharp decline in available supplies from South American growers.

Indeed, historical patterns suggest that China typically relies heavily on shipments from South American growers for the coming months as the US crop develops, before switching its origin to the US once harvest supplies are available towards the end of the year.

However, given the clear shortage of soybeans in Brazil and Argentina following this year's drought, Chinese buyers may be forced to turn to US exporters sooner than usual this year to potentially exacerbate the sense of tightness already underpinning soybean values across the country.

Given the likelihood for both additional supply downgrades as well as increased buy-side interest by spooked end-users over the coming months, it is clear that the soybean market must continue to reflect the need for urgent reductions in usage.

But as stated earlier, such demand-rationing signals do not necessarily need to emerge in terms of additional flat-price strength, as a further widening in nearby versus deferred price spreads would have a similar impact at the all-important consumer level.

It is not yet clear how much demand rationing/postponement has already occurred through the latest widening in the spreads.

But if the emerging crops continue to wilt rather than thrive across US fields, it is obvious that price differentials may need to get even more extreme if the prevailing low level of inventories is to avert further depletion.