Aug 19, 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.

Jan USDA Report Preview

Jan 09, 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.        

On Friday January 10th the USDA will release a series of reports that will set the tone in grains for months to come.  This Jan report is a big one because it will finalize production numbers from last year and give us major insight to the supply side of the equation going forward.  The USDA will also release Dec 1st quarterly grain stocks which will help determine supply going forward but will also show us how strong demand has been.  Finally the USDA will also update their figures on the South American crops, world balance sheets and winter wheat seedings.  

For the most part the trade is looking for this report to be bearish for corn, wheat and new crop soybeans.  There is a good portion of the trade that is looking for a bullish old crop soybean report and many think that this could help support corn and wheat as well.  Honestly, I was nervous when I published our trade estimates because I thought we would be the most bearish estimates out there (which would officially make me the least popular guy at the party).  But, as it turns out our estimates were dead on average for everything except one area - old crop soybean stocks.  This was a bit of a relief, but not really because it seems that a lot of guys are depending on a bullish old crop soybean report to keep everything from falling under pressure.  

So, lets look at the old crop soybean situation.  Export sales are strong and have been the reason for a tight projected balance sheet and therefore a supporter of prices.  However export shipments, while still about 112 million bushels better than this time last year, are lagging behind the record export sales figures.  From a production standpoint this last growing season turned out to be a surprisingly good year for corn and a bit of a disappointing year for soybeans.  At least this is the idea that the market has been working with for the last few months.  However, the USDA did not have a whole lot to go on when they gave us their crop production estimates in November.  Generally they are collecting data during harvest in September and October to give us their production estimates on the October report.  This year this did not happen because of the government shut down and the USDA was not able to give us a field based production report until November.  Now, for corn there very well could have still been enough unharvested acreage to get a good handle on production, but for soybeans it must have been darn near impossible to collect much usable data at that point.  So, they basically had to take their best guess for soybeans (no comment on their track record of guessing...).  Now that we will get a good look at December 1st stocks we will be able to take a better guess on what production was and it could be much different than the USDA's November production estimate.  

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

This Quarterly Grain Stocks report scares me.  I remember very well last year when the USDA found an extra 400 million bushels of corn on the May 1st grain stocks report and this one could be setting up the same way.  When we got the May 1st Quarterly Grains Stocks report in June of last year we were shocked to see that the USDA had been wrong somewhere and stocks were significantly higher than expected.  This could be a similar situation with the USDA taking their best guess on production last November.  Now we will actually see how close they were.  It could certainly go the other way too.  It could be the case that they were dramatically over estimating soybean production, but with corn coming in so much better than expected I would lean toward a bigger than expected stocks number.  Either way Dec 1st grain stocks could be the biggest number on this report.   

World numbers are expected to jump as well.  Brazil has good weather for most of their growing season and we are expecting a good crop.  A big South American crop would likely mean some of our export sales would get canceled or switched to South American origin.  Not to mention that Brazil's CONAB is projecting a monster soybean crop.  This is coming from a state run agency that has a reputation for under estimating production figures.  It just so happens that this usually keeps soybean prices elevated into their harvest and marketing season.  

One way or another this Jan USDA report is likely going to be a market mover.  There are so many important numbers coming out that something is bound to be a surprise.  I hate to say it, but my gut feeling is that we get a somewhat neutral report for corn and wheat and get a bearish surprise for old crop soybeans.   

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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