TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS 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.
On Monday the USDA will release the March 31st Quarterly Grain Stocks and Prospective plantings report. Last year this same report was a massive surprise and sent grain markets reeling. The impact of this report last year was profound and set the tone for months to come. The impact of this report this year is yet to be determined, but it could be nearly as important as last year. Let's take a closer look at grain stocks for corn and soybeans.
Soybeans - Grain stocks is a very important number for old crop soybeans and we could argue that old crop soybeans have significant influence over the grain complex as a whole. The sharp rally in old crop soybeans is based on the idea that we will have very tight stocks this year, maybe even tighter then last year. Concerns of running out of soybeans this year sparked more then a $2 rally off lows. But are stocks really as tight as the market perceives and is there still need for price rationing to cut demand? This report will go a long way to answering this question. If stocks are tighter then expected it could cause a sharp price rationing rally in soybeans. If stocks are not as tight as feared it may take much of the bullish story away from soybeans and cause prices to fall.
From our point of view it seems likely that soybean stocks could exceed expectations. The average trade guess for soybean stocks is 987 million bushels compared to 998 million bushels last year. So, the trade is looking for soybean stocks to be slightly tighter than last year. However, it certainly feels different this year then it did last year. For the most part everyone we are talking to, commercials and producers alike, either have soybeans or can easily get soybeans. Last year soybeans were much harder to find which could suggest that there are more soybeans out there this year. Interior basis is a good indicator of this. Last year at this time cash basis bids for soybeans were sharply over futures prices, while this year cash basis bids are over in some places an under in others. This weaker basis this year could be suggesting that there are more soybeans available this year compared to last year.
CME Options On Futures: The Basics: http://www.zaner.com/offers/?page=9&ap=tseifrie
Corn - Grain stocks is also a very important number for corn this year, but for different reasons. Corn does not have the perception of a tight balance sheet like soybeans do. In fact at one point the market thought that this year we would see the highest corn carry over in recent history. But, in the last few months the USDA has dramatically increased demand and therefore lowered ending stocks numbers to more normal levels. As of the March USDA WASDE report they are estimating a 2.214 billion bushel increase in corn demand this year. This has allowed corn to bounce off of lows and set new highs for the year. This stocks report is important because we will get to see if the stronger demand and lower ending stocks numbers the USDA is estimating are justified. If stocks are lower then expectations it could mean that demand is even stronger and that corn can support higher prices. If stocks come in lower it could mean that higher prices are hurting demand and adding bushels back on the balance sheet.
It is very difficult to try to guess corn stocks this year, for two main reasons. For one, feed demand is a big question. Currently the USDA is looking for a 965 million bushel increase in feed from year to year. This is a huge increase and while there are certainly some factors that suggest a higher feed number there is still an issue with animal numbers. A cold winter, dryness in the SW Plains, higher weights and a shift back to corn from wheat for feed do indicate that feed demand is larger then last year. However, our cattle on feed herd is 1% lower then last year and the PED virus has taken an estimated 4-6 million hogs out of the market. So, feed demand is higher this year, but does it justify an almost 1 billion bushel increase? From what we can see the USDA may be 220-280 million bushels high on feed demand unless they are using this number to account for a miscalculation made in the past.
The other issue we see with this Quarterly grain stocks report is where grain is being stored and how it is being reported. A large portion of last years crop is currently being held in on farm storage. Because of this it creates a tricky situation for the USDA. Typically the USDA uses phone surveys to get an idea of on farm storage, but some producers are not always forthcoming with the full extent of grain kept on farm. Honestly, I don't like the government knowing exactly what I have either. But, this creates a problem for the USDA because this year they could end up with a sharply lower, and inaccurate number. In fact this could offer some insight into where we found an extra 400 million bushels on this report last year. It could be that there was significantly more corn being stored on farm going into the drought and rally to record high prices and guys really did empty out the bins as prices started to come down. This could account for at least some of the found bushels.
So, this is going to be a very interesting and very important report on Monday. It may not have as big of a surprise as last year because the range of guesses is very, very wide. None the less this report will have a huge impact on the direction of grains going forward. And it really is anyone's guess.
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May Corn Daily chart:
May Soybeans Daily chart:
May Wheat Daily chart:
All this means that speculators should be looking for opportunities and producers need to look to lock up some prices. 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 options / options-futures 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 email@example.com
Additional charts, studies, and more of my commentary can be found at: http://markethead.com/2.0/free_trial.asp?ap=tseifrie
Futures, options and forex trading is speculative in nature and involves substantial risk of loss. This commentary should be conveyed as a solicitation for entry into derivitives transactions. 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.