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 the Low in for Dec Corn?
Aug 21, 2014
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.
This is one of the burning questions in the grains markets at the moment - Is the low in for December corn? An argument can be made for either side of this debate. One thing we can mostly all agree on is that any rally in corn could be limited. But, will the December contract see new lows before expiration?
There is a lot of convincing things you can say about the lows in corn being in for now. From a fundamental standpoint the most bearish news about the size of the crop is likely behind us. A few weeks ago many analysts were talking about some super sized yield forecasts. Most analysts are now looking at the national average corn yield a little over or a little under 170 compared to the 174-176 estimates we had been hearing. Now that most of the trade has come back down to reality the thought is that we will still have a record yield and a record crop but not by as huge of a margin. So the market may have already factored in bigger expectations then the reality.
Demand has also grown substantially with lower corn prices. From the 2012/2013 to the 2013/2014 marketing year corn usage increase a little over 2.4 billion bushels! To put this in perspective this is well over twice the projected carry out from the current marketing year. The 2012/2013 was a drought shortened crop that saw record high prices which rationed demand substantially and the sharp increase in demand for 2013/2014 was in large part due to pent up demand from the previous marketing season. However, it is still a very good example of how demand can grow with lower prices. So far export demand is been impressive for the new crop corn.
Sign up for our Morning Ag Hedge newsletter! Sign up here: http://www.zaner.com/offers/?page=17
From a technical standpoint a bullish argument can be made as well. On August 4th December corn made a new contract low and then ended up closing over the previous day's high. This is called a key reversal and can sometimes be an early indicator of a change in trend. Then on August 12th, the day of the August USDA WASDE report, December corn came 1 tick away from putting in a second key reversal. And, on a weekly chart December corn posted a weekly key reversal last week. When you put all of this together you can build a strong technical case for the lows being in for December corn.
On the other side of the coin however the upcoming harvest has the potential to put a lot of pressure on the corn market. We are in a much different position this year then last year as far as the storage situation goes. There was a huge amount of available storage going into last year's harvest. This is mostly due to the record high prices of the previous summer motivating guys to clean out the bins and sell everything. This year there is still a large amount, I'll argue even more then the USDA knows about, of corn sitting in storage. To make things worse it seems like too many producers waited too long to make sales and there is a lot of unpriced corn out there and much of it could get priced during harvest. This could cause substantial pressure to the cash market and futures market as well. If this is the case we certainly could still see new lows in December corn even though the crop might not be as big as what the market was talking about a few weeks ago.
Longer term I do think we will see higher corn prices. Once we get past that initial harvest pressure corn prices could have a good chance of going higher. Low priced corn at harvest could bring in substantial buying from global and domestic end users. Also, the price of corn can only stay below the cost of production for so long before we don not plant any more corn. Corn will have work to do to buy some acres as producers ponder planting intentions. The way the board is now there is no incentive to plant corn and every incentive to plant soybeans. However, this might not be what the world needs at this point. With record acreage in the US and South America and record stocks of oil seeds in general we may have bought more then enough acres globally.
In the short term I am concerned that December corn could still make new lows as we get into harvest even though this crop might not be as big as once expected. Cash sales coming off the combine may bee to much pressure to keep corn from putting in a new contract low. However, longer term corn may need to see higher prices to avoid a sharp drop in acreage next year.
We have awesome CRB wall charts to give out! They are weekly bar charts that go back 10 years to Oct, 2003 and are about the size of a poster. If you'd like one sign up here - Corn: http://www.zaner.com/offers/index.asp?page=20
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. 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.