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.
Is Corn Demand Slipping at Higher Price Levels?
Mar 13, 2014
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.
Since January corn has rallied over 80 cents off of lows. Prices have strengthened on thoughts of growing demand chipping away at the large ending stocks figure. The USDA has indicated that ethanol, feed and export demand for corn has been increasing while corn prices were down in the low $4.00 range. But, now that corn is trading at higher levels how is effecting this newly re energized demand?
A few months ago the trade widely believed that we could see a corn ending stocks figure above 2 billion bushels. This would have been the largest corn carry over in recent history and would have been a burdening supply of corn. This sent the corn market on a mission to "buy back" demand with lower prices. According to the USDA lower prices have been successful in growing demand. In November the USDA increased feed demand 100 million bushels and exports by 175 million. In December the USDA increased ethanol and export demand by 50 million bushels each. In January the USDA increased feed demand by 100 million bushels and ethanol demand by 50 million. In February the USDA increased export demand by 150 million bushels. In March the USDA increased export demand by 25 million bushels. Over the course of the last 5 months the USDA has increased demand by 650 million bushels.
In fact, at this point the USDA's estimated total usage of corn is 2.214 billion bushels above last year! This is certainly a reflection of how record prices slowed demand last year as well as a reflection of how low $4.00 has encouraged demand this year. But, now that corn has rallied over 80 cents off of lows how will this effect this 650 million bushels the USDA has added in the last five months and the 2.214 billion increase over last year?
As we have seen in the last few years corn demand is extremely price sensitive in this current global economic set up. This is called price elasticity of demand. In other words, lower prices have a profound effect on increasing demand just as higher prices have a profound effect on decreasing demand.
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Knowing that corn demand is so sensitive to price the concern now is that higher prices will start rationing some of this demand and start adding bushels back on to the balance sheet. We are now starting to see the early signs of this. The weekly ethanol report showed that last week corn used for ethanol fell almost 5 million bushels and was 6.5 million bushels below the weekly average needed to hit the current USDA estimate. Export sales suffered this week as well. Thursday's export sales report showed that corn sales were 26.9 million bushels compared to 59.8 million last week. This is a 32.9 million bushel decrease and is sharply lower then the previous 4 week average.
Feed demand is a big question. The USDA is currently estimating a 965 million bushel increase in feed demand from last year. To an extent an increase makes sense as a cold winter has increased the need for feed and cattle weights are higher. However, the cattle heard continues to hover near the lowest level since reporting started in 1996. This may not justify such a large increase in feed, and cattlemen may be very price sensitive after years of tight or negative profit margins. This will become more clear on the March 31st quarterly grain stocks report.
The bottom line is that corn has had reason to rally with the USDA adding 650 million bushels of demand and cutting ending stocks to more normal levels. The worst news in corn is most likely behind us. Gone is the talk of a 2+ billion bushel carry over. But, this increase in demand was based on lower prices and with corn demand being so price sensitive it may be the case that an 80 cent rally off lows could begin to slow demand and add bushels back to the balance sheet. Corn is currently in the process of testing its limits and exploring how price sensitive this new demand is. We are now starting to see some signs that demand could be slowing at current levels. If this is the case corn prices may need to come back down to keep demand strong.
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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 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.