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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.

Frost Concerns Become More Widespread

Aug 15, 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.        

Grain markets were sharply higher as frost concerns heat up.  I wrote an article a few weeks ago expressing my concern over an early or even normal frost causing damage.  With crops in good condition but well behind and below normal temps for most of the growing season concern is understandably growing.   So how much should grain prices rally?

A few weeks ago when I started talking about my concern for frost damage weather forecasters were generally in agreement that the chances of an early frost were low. Not only has the tone changed in the last few days, but traders have now started to figure out that a normal frost could cause some significant damage.  After a surprisingly bullish USDA report on Monday its interesting to see the bulls coming out of the woodwork citing any bullish piece of news and ignoring the bearish fundamentals that were center stage just a week ago.  I do think frost should be a big concern, and I do think that weather premium needed to be added especially to soybeans.  But, just as we may have gotten ahead of ourselves on the push to new lows we may now be getting ahead of ourselves on the idea of early frost.  

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

Until recently weather forecasters were predicting less then a 15% chance of an early frost.  My argument was that we had already seen an early frost on July 26th in some northern areas and that a normal frost could cause damage as well.  At the time the trade was caught up in good crop conditions and the potential for massive crops.  It seems that now forecasters and traders alike have swung to the other side of the pendulum.  Now forecasters are making comparisons to 1974 when an early frost caused major damage.  There are some similarities between 2003 and 1974, most importantly a cool wet spring causing late planting and cooler then normal temps in June and August.  Another concerning point is that the build up of cool air in the arctic is stronger this year then in most.  But, before we rally corn and soybeans back to record highs we should also consider that there have been many years where heat has come late and carried over into fall.  This could be the case this years as we are looking for a warm up in the coming weeks.  

At this point I believe frost is a concern and forecasts going into September need to be watched.  I do think that this uncertainty and potential for damage should translate into a weather premium at this point.  However, with crop conditions good  and some warmer temperatures in the forecast for late August it might be too early to get too excited.  The fact remains that if crops do escape the threat of frost damage we will have bigger carry over then what we have seen in recent years, especially in corn.  For soybeans, even though the US carry over number is not as massive as corn might be the world numbers are huge.  South America has product to sell and will need to get more moved soon.  If domestic US prices continue to rise South American imports could become more attractive and realistic.  

For now I think it is good that markets have added some weather premium in for fear of frost damage.  If nothing else it is providing opportunities to sell soybeans higher and corn may offer the same opportunity soon.  But that may be about it.  As of now I think frost is something the market should be concerned about but I also think the chances of major frost damage is relatively low, maybe 30% chance at most.  My gut feeling is that this warmer weather expected for late August could be a sign of warmer weather carrying over into September.  Even if frost is still in the cards for late September the warmer temps in front of it may do a lot to push crops toward maturity.  As usual with weather markets it could be volatile until we have a better idea about how this will play out.  For the moment my bias is toward missing any major frost damage and lower prices into harvest.  

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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.   

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 corn near $5.00 and soybeans near $12.00. 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 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 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?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.

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