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The Ted Spread

RSS By: Ted Seifried, AgWeb.com

Ted is the Chief Market Strategist and Vice President in charge of the Zaner Ag Hedge Group and specializes in agricultural hedging employing various strategies using futures, futures spreads, outright options and option combinations. He believes it is paramount to be able to use different strategies to adapt to market conditions. Ted works with large to mid size grain and livestock producers and end users in North, Central and South America.

For the USDA Report

Aug 09, 2012

TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND MAY NOT BE SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES.   

 

Corn set new highs and posted a new high close as soybeans rallied 50 cents today in front of tomorrow's key USDA report.  We ended up right where I felt we should be going into the report as we spent so much energy getting up here based on our guesses or fears about production losses and tomorrow the USDA weighs in.  As far as this report is concerned, my views have changed a bit in the last few days.

I was under the impression that the average trade guesses were going to be wildly bullish when it came to ending stock numbers.  As it turns out, the trade guesses are really not far off my projections.  The average trade guess for 12-13 corn ending stocks is at 660 million bushels and I am currently using a number of 683 million bushels, and for soybeans the average trade guess for ending stocks is 112 million bushels while I am using 114.  I guess I just felt safe in assuming that with the prices we have that the trade was looking for a sub 500 in corn and sub 100 beans.

I see this report playing out in one of three ways depending on how the USDA wants to handle the demand side of the equation.  It really depends on how aggressive the USDA wants to be on cutting demand on an August report.  There is a good chance that they may temper their changes in order to wait for more concrete demand information over time, or they might want to tweak their numbers to keep prices elevated to help ration demand for now.

Options on Beans for People Who Don`t Know Beans About Options: http://www.zaner.com/offers/?page=8&ap=tseifrie

The first possibility I see is the USDA aggressively lowering yield while leaving demand unchanged.  This would result in ending stocks far lower then the average trade guesses.  This would also be a wildly bullish scenario sending grains to new, lofty highs.  However, I do not see the USDA wanting to significantly cut ending stocks now and then build them back up in future reports based on lower demand.  I'm putting a 15-20% chance on this scenario.

The second possibility I see is the USDA modestly lowering yield and aggressively lowering demand, ripping off the band aid so to speak.  This could result in higher ending stocks numbers then expects and could also put a top in the market until after we see harvest lows.  Although I do believe they would be justified in doing this, I am not sure the timing is right.  The reason I think they would be justified in doing this is because the high prices we have currently should go a long way to ration demand.  My reasoning for this is mostly due to the current economic situation domestic and abroad.  This is not like 2008 when high prices had a hard time curtailing demand.  Demand for grains and products produced by or with grains are much more price sensitive these days.  Your average American is not feeling rich because their 401k can do no wrong like the first half of 2008.  Everybody's pocket book is tighter and demand for meats, ethanol and other products will be highly sensitive to price unlike in recent years...  Again, I think this is an unlikely scenario for this report because even though demand will be very price sensitive the USDA may feel we need more time up here to do the job.  I put a 20-25% chance on this scenario.

The third possibility I see is the USDA modestly lowering yields and modestly lowering demand, or leaving demand unchanged and just slightly lowering yields at this time.  This is the scenario that the average trade guesses represent.  Basically this would be a punt for the USDA and the market will know it.  After making whole sale changes on the last report the USDA may want to only make small changes this time around, fully knowing that further changes will be necessary on both sides of the balance sheet but effectively buying time to collect more data and make a more careful move.  If this is what we see tomorrow it will not be a very popular move and traders that know what they are looking at will shrug it off and call it what it is - a punt.  However, I do think this scenario would be met with a modestly bullish reaction as the trade collectively pats itself on the back for "getting it right".  I put a 60-65% chance on this scenario.

For some this last scenario will justify $8.30 corn and $16.40 beans.  Once again this is where I differ.  For reasons outlined in the second scenario I really feel that demand rationing is not going to be as hard as some people think given our global economic situation.  Also, for soybeans we may have a bail out coming in the form of record planted acreage in South America.  No guarantee they come off without a hitch, but if they do we will be flooded with flooded with cheep beans from south of the border come Feb thru May.  Finally, I am not so sure a 660 million bushel carry over in corn is tight enough to hold prices above $8.00 even without price rationing, same fro soybeans with a 112 million bushel carry over and $16.00.

Over the next few months, it seems certain that there will be another sizeable decline in yields, however I would also imagine that we could see a significant drop in demand based on current prices.  The question will be - does the resulting carry over justify these prices?

CME Options On Futures: The Basics: http://www.zaner.com/offers/?page=9&ap=tseifrie

With high volatility in a weather market, option strategies may be a good tool for hedgers and specs alike.

December Corn Daily chart:

November Soybeans Daily chart:

All this means that speculators should be looking for opportunities and producers need to look to lock up some prices while we have new crop corn above $8.00and new crop soybeans above $16.00. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the strategies that I am currently using.

In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent.

Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs.

Be safe!

Ted Seifried (312) 277-0113 or tseifried@zaner.com

Please check out my Blog at: http://tedseifriedfutures.com/

Additional charts, studies, and more of my commentary can be found at: http://markethead.com/2.0/free_trial.asp?rid=Seifried

Futures, options and forex trading is speculative in nature and involves substantial risk of loss. All known news and events have already been factored into the price of the underlying commodities discussed. The limited risk characteristic of options refers to long options only; and refers to the amount of the loss, which is defined as premium paid on the option(s) plus commissions.

FOR CUSTOMERS TRADING OPTIONS, THESE FUTURES CHARTS ARE PRESENTED FOR INFORMATIONAL PURPOSES ONLY. THEY ARE INTENDED TO SHOW HOW INVESTING IN OPTIONS CAN DEPEND ON THE UNDERLYING FUTURES PRICES; SPECIFICALLY, WHETHER OR NOT AN OPTION PURCHASER IS BUYING AN IN-THE-MONEY, AT-THE-MONEY, OR OUT-OF-THE-MONEY OPTION. FURTHERMORE, THE PURCHASER WILL BE ABLE TO DETERMINE WHETHER OR NOT TO EXERCISE HIS RIGHT ON AN OPTION DEPENDING ON HOW THE OPTION'S STRIKE PRICE COMPARES TO THE UNDERLYING FUTURE'S PRICE. THE FUTURES CHARTS ARE NOT INTENDED TO IMPLY THAT OPTION PRICES MOVE IN TANDEM WITH FUTURES PRICES. IN FACT, OPTION PRICES MAY ONLY MOVE A FRACTION OF THE PRICE MOVE IN THE UNDERLYING FUTURES. IN SOME CASES, THE OPTION MAY NOT MOVE AT ALL OR EVEN MOVE IN THE OPPOSITE DIRECTION

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