Sep 20, 2014
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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.

How will the Soybean Residual Effect USDA Balance Sheets?

Aug 29, 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.        

On the monthly USDA WASDE reports the USDA has a category on the soybean balance sheet that seems to serve as a "miscellaneous" entry.  This is the Soybean Residual figure.  I am not sure if there is a clear definition for this number, but it generally means demand that does not fall into the categories of - crushings, exports or seed.  The interesting thing about the soybean residual is that it has a wide range in recent years and apparently can even be a negative number.  Currently the USDA is estimating 29 million bushels for the 2013/2014 marketing year.  

The soybean residual figure is very difficult to estimate.  It is not crystal clear what makes up this category and there is no solid historical trend by which to go by.  About the only loose consistency that can be drawn from the last ten years is that the residual figure tends to be bigger in years with big carry overs and smaller or even negative in years with tight carry overs.  With the outlook for smaller production numbers for the 2013/2014 crop we have to wonder if the soybean residual number is going to play a role in lessening the potential tightness in soybeans in USDA reports to come.  

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In the August USDA WASDE report the USDA lowered residual demand for the 2013/2014 crop by 4 million bushels from 33 million to 29 million.  With hot and dry conditions through much of August there is much talk around the market that crop stress in key growing areas will lower production potential.  If the USDA does have to lower their production numbers going forward it would seem that there might be quite a bit of room for the residual number to come down as well and offset some of the lower production.  This could be a year where the soybean residual number is small or negative.  

At 29 million bushels the current residual number is on the higher end of recent years.  For example, last year in 2012/2013 the USDA is estimating residual at 5 million bushels with their final number to be released next month.  In 2011/2012 the soybean residual figure was actually at -2 million bushels (that's right negative 2 million).  I am not sure how a demand number can be negative.  Is residual giving back or adding soybeans to the supply chain?  Either way, the residual number can be negative.  On the other end of the spectrum soybean residual was at 38 million bushels in 2010/2011 when carry over numbers we 225 million bushels.  So , it seems when cary over numbers are large (and prices are low) residual demand is high, but when carry over numbers are low (and prices are higher) residual demand can shrink to nothing or a negative number.   

The impact the soybean residual on upcoming USDA reports could be big.  As production estimates decline the residual demand number might also get smaller and partially offset the impact of lower production.  There have been a lot of lower production estimates recently mostly due to lower yields but also due to lower acreage estimates.  At this point it seems very unlikely to me that the USDA will make a third revision to acreage numbers at least until after the final harvest numbers come in.   

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So, if we were to plug in the Pro Farmer production number (3.158) into the USDA balance sheet and lower residual demand by 25 million bushels while leaving everything else unchanged the end result would be about a 150 million bushel carry over.  At this point with higher US prices you could also argue that export demand could decline and imports to the US may increase with a big South American crop that has largely yet to be moved.  In the end the soybean residual may help to keep a lid on soybean prices.  However, if soybean yields slip below 40 bushels an acre then lowering the soybean residual will not be enough and some further price rationing may be needed. 

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

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