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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.

Is the High now in for Soybeans?

Feb 27, 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.        

Soybeans have been on massive bull run in recent weeks on fears that the US may run out of soybeans this year.  These fears stem from strong crush numbers, a record pace of export sales and a lack of cancellations/switches of previous sales. But, is Thursday's big reversal off highs signaling that a top may be in for now?  

To date US export sales have reached 1.597 billion bushels compared to the current USDA export estimate of 1.51 billion bushels.  This means that if all of the soybeans that have been sold for export do in fact end up getting shipped out this year we would be 87 million bushels over the current USDA estimate and with the current USDA ending stock estimate of 150 million bushels it could mean that if everything else on the balance sheet remained the same ending stocks could slip to a dangerously low level of 63 million bushels.   

This would be the lowest ending stock number on record and would be well below what the USDA considers "pipeline supply".  This fear has sent soybeans (old crop in particular) on a price rationing rally with the intention of shutting down export demand.  In the last three weeks soybean export sales have slowed dramatically, but they have still been a positive number each week suggesting soybeans have had more work to do to shut down export demand.   

Thursday started with another positive export sales number that sent soybeans soaring to new recent highs, at one point 47 1/2 cents higher in the May contract.  However, shortly after the export sales report the USDA announced another sale of 112k metric tons of soybeans to China in 13/14.  The thing that was different about this sale though was that it was from optional origin.  This means that this sale can come from the US or any soybean exporter.  This did not sit well with the market as traders realized that if this is the way China is going to structure sales from here on out it could mean that the origin may end up being South America and it could effectively end the US export sales business with China for the year.  

On top of that there was talk all day of more cancellations and switches.  Towards the noon hour it came to light that China had switched 4 panamaxes of old crop soybeans to new crop delivery.  This put substantial pressure on the market and erased all of the gains from the day and much of yesterday's.  The thing is, this may not be a one off scenario.  This may continue to happen or may have already happened more then the market realizes.  I have also heard talk that one of the major global grain companies has already taken in more South American imports then the current USDA estimate of 35 million bushels.  If this is true, a vast majority of the export sales above and beyond the current USDA estimate could be offset by imports.  There has even been some stories of container ships of South American soybeans reaching their destination in the US only to refuel and turn around for China.  So far, I have not seen any conformation of this, but I have heard this story more then once.  

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There is also still the possibility of more switches and cancellations of soybean export sales which could bring the export number in line with the USDA estimate.  So far 1.325 billion bushels have been shipped of the 1.597 Billion bushels sold. There is still a chance that 87 million of the outstanding 272 million bushels get switched or canceled which would bring us to the USDA export number of 1.51 billion bushels.  Even if this does not happen, at these prices we may see imports on a much larger scale then in previous years.  

The bottom line is that this situation is much different then the sharp rally in 2012.  In that situation a drought in South America followed by a major drought in the US left world ending stocks at very low levels and caused a need for sharp price rationing of demand to allocate the short supply of soybeans.  Right now the US has a tight soybean situation, but with a massive crop in South America the world numbers show a potential for a record carry over.  This means that although the US situation is tight the world situation is not so global importers can look outside of the US to fill their needs.  Furthermore it may mean that the tight US situation could be remedied by imports of South American soybeans.  So, the tight US situation may only be temporary as South America gets into the swing of exporting their massive crop.  

November soybeans did not have as sharp of a rally as front month, old crop soybeans but did enjoy some carry over strength on the move.  Here again the sweeping reversal down day on Thursday could be signaling a top for now.  Certainly there is still a growing season and a weather market to get through.  With big acreage numbers expected for soybeans and what could be a record world carry over going into next year the outlook for new crop soybeans could be turning quite a bit more negative and could easily shed the rally off lows.  Short of a major weather issue this year soybean prices could be much lower next year and the spread difference between old crop and new crop shows it.  This has to be a concern for soybean producers.  The good news is that the recent rally off lows has given producers an opportunity to lock up some better prices for some of their production.  

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So, we are likely still in for some volatility after the strong run in soybeans and Thursday's sharp reversals.  The bull camp is still out there and could see this as a value buy.  But, it seems that the tide may be turning and in the long run it is hard to justify soybean prices at current levels with the possibility of South American imports.    

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.     

March Corn Daily chart:

March Soybeans Daily chart:

March 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 tseifried@zaner.com

Additional charts, studies, and more of my commentary can be found at: http://markethead.com/2.0/free_trial.asp?ap=tseifrie

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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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