The Ted Spread
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.
Are we going to see Sub $4.00 Corn this Year?
Oct 10, 2013
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.
A higher then expected Quarterly Grain Stocks report and better then expected yields coming off combines has cast a bearish cloud over the corn market. This has us asking the question - Can corn crack the $4.00 level this year? Given the potential for the biggest ending stocks in over a decade it would seem that the answer would be yes it could. However, there may be a big difference this year between what basic fundamentals suggest corn can do and what corn will do. So, the real question is will corn break $4.00 this year.
The fundamental set up in the corn market is undeniably bearish. The corn market has certainly reflected this as it has been on a steady decline for months leading to the lowest prices in well over a year. This would certainly seem to be justified by slowing demand figures and growing supply projections. In theory it would make sense that if we are going to have the largest ending stocks in recent history we should also see some of the lowest prices in 10 years or so, again - in theory. This year however theory and reality may not be aligned.
The absence of the USDA is an issue for all Ag markets. The lack of updated supply and demand figures leaves markets somewhat in the dark. But, this USDA shut down should have the least effect on corn because we all know that ending stocks for corn are going to be big, its just a question of how big. Honestly I am not sure if it makes much difference for this years prices if we have a 1.7 billion bushel carry over of a 2.1 billion bushel carry over. Either way we will have no fear of running out of corn this year. The difference between a 1.7 billion bushel or a 2.1 billion bushel carry over may have a significant impact on the next crop's prices but maybe not this year.
Sign up for our Morning Ag Comments: http://www.zaner.com/offers/?page=17
At some point the corn market may work to achieve some key (and maybe uncomfortable) objectives. If we continue to have huge corn carry over numbers the market will want/ need to encourage or buy back demand and/or decrease supply. I will go into more detail on how the market may try to achieve this in future articles, but for now the short answer is lower prices maybe much lower prices. However, as we are just one year removed from a major drought year, tight ending stocks and record high prices it is only a possibility that corn will need to encourage demand and slow production rather then a certainty.
This year is likely a year where lots of corn will find its way into storage. We have no idea what next years growing season will bring or what crops will look like. So, I think corn would be jumping the gun at this point to try and go and encourage demand or slow production. And, it comes at a good time because after three years of good prices leading to record prices last year few producers are strapped for funds and there seems to be lots of storage available. After record prices bins have been emptied and producers have reinvested into their operation by adding storage. So, it would make sense that guys will look to store corn and if this happens on a large enough scale it very well could keep the cash market relatively tight and keep corn bolstered over $4.00.
So, corn may have the basic fundamentals to see prices well below $4.00 this year but, given the bigger picture I am not sure we will. I think it is likely that producers store and hold tight at low prices and this could keep prices from a free fall. The concern might be next year, but we do still have South America's and our growing seasons to get through first. Either way producers should be looking at some cheep "worst case scenario" puts for this year and really consider looking at locking in a floor for next year. More on what to do with next year in articles to come.
Feel free to give me a call or shoot me an email if you would like to talk about your marketing plan, the markets, weather, or just to visit.
CME Options On Futures: The Basics: http://www.zaner.com/offers/?page=9&ap=tseifrie
December Corn Daily chart:
November Soybeans Daily chart:
December 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 firstname.lastname@example.org
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.