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.
Big Test for a Bull Market
Aug 14, 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, Wheat and Soybeans have been on the defensive since the first few minutes after last Friday's key USDA report. The thing about that report was that although the ending stocks for corn and soybeans are tight due to the drought conditions, they are not nearly as tight as we were fearing given the large cut the USDA made in yields. We saw lower then expected yield numbers yet ending stocks came out as expected, so the surprise was the extent of the cut in demand at these prices. The USDA obviously feels that demand is price sensitive enough this year that the $3.00 plus rally in corn and $4.00 plus rally in soybeans had made a significant dent.
It would be one thing if the USDA had not aggressively cut yields on this report because the bull camp would be rallying around the cry - They will have to cut yields further in coming reports! However, with a 123.4 bushel an acre yield for corn and a 36.1 bushel per acre yield for soybeans it seems likely that the USDA feels they have made deep enough cuts for now and will not want to make any significant changes until they release their final harvest numbers in November.
For soybeans in particular the ending stocks number has to be concerning. Yes, 115 million bushels is tight and we could eat through that very quickly. However, it is not the tightest ending stocks number we have seen from the USDA even in the last 5 years (for example, on the September 2009 USDA report we were looking at 110 million bushel carry over and beans were trading just over $10.00) and yet here we are trading record high prices. Furthermore, we are lacking the outside inflationary pressures and the inelastic demand we had in 2006-2008. The fact is that the economy is not doing as well as it had in years past and demand for things even from the common consumer is much more price sensitive. We do need to have high prices so that there are cutbacks in demand, but given this current USDA balance sheet it seems we may have over shot the mark. Also, South America is looking to plant record acreage and if they can have a decent crop this year we could be flooded with cheep SA beans come Feb-April.
When Does Weather Matter: http://www.zaner.com/offers/?page=6&ap=tseifrie
For corn the technical picture now starts to get a little muddy as we have seen three sweeping key reversals in basically a month, book ended by USDA reports from July and August. Now, a key reversal is definitely not a silver bullet when it comes to ending a trend, however 2-3 of them in a short period of time have to be seen as a warning sign. Unlike July's report day key reversal which was followed by two strong days that eventually made new highs, last Friday's key reversal has so far been followed by two down days and we currently sit 60 cents off highs. Again, this does not make it certain that the bull market is giving up the gun, but it is certainly cause for concern and bears watching.
CME Options On Futures: The Basics: http://www.zaner.com/offers/?page=9&ap=tseifrie
The bottom line is that I am not trying to scare people, or change anyone's mind. I want to touch on a side of the market that maybe many people are not seeing. And, maybe explain some of the recent market reactions. The point of this exercise and the reason for the title of this piece is that we are at a cross roads here and now. Gone are the days where we come in and see a hot and dry forecast and rally 30-40 cents. Weather can not be our bullish fodder anymore. So this is a test of this bull market. To continue to make new highs we will need to find some new bullish rhetoric and/or a new bullish stimulus to keep us going. It does occur to me that the USDA's final numbers in November could be bullish due to a drop in harvested acreage... but right now that seems like a long ways off.
With high volatility in a weather market, option strategies may be a good tool for hedgers and specs alike.
So here's my number... Call me maybe?
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 while we have new crop corn near $8.00 and new crop soybeans near $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.
Ted Seifried (312) 277-0113 or email@example.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