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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.

The Bullish Case for Corn

Nov 21, 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.        

A big corn crop and big ending stocks numbers have pushed corn to three year lows.  But, going forward there could be good reason for corn to carve out a bottom in the near future and turn higher.  Lets look at the bullish case for corn.  

Corn export sales have taken a bit of a backseat to the exciting soybean export sales, but corn has seen a lot of interest as well.  On the November USDA WASDE report they increased corn exports by 175 million bushels.  So far, the pace of export sales has suggested that this could certainly be justified.  For the week ended November 14, 2013 corn export sales had reached 960 million bushels compared to the USDA projection of 1.4 billion bushels for the current marketing year.  Compared to 470 million bushels at this time last year this is a big improvement.  Now, this time last year we had just come off of a major drought and record high corn prices which price rationed exports very well, but this is a big improvement none the less.  What this shows is that the price/demand function is working well.  High prices = less demand as we saw last year and low prices = more demand as export sales would suggest this year.  With the current pace of export sales it seems that we will easily hit the current USDA projections and the USDA may need to increase exports in the future.  I do have a concern however (as I have stated in previous articles) that strong sales may not translate into strong export shipments, but for now lets focus on the positive.  

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

Corn used for ethanol is also a hot topic lately.  Last week the EPA proposed a 16% reduction to the current ethanol mandate.  This was seen as a bearish input to the corn market.  While it most certainly was not good news we don't think it will have a major impact on corn prices this year.  Just as with exports low prices should translate into more demand, but with ethanol there is an added bonus.  Energy prices have stayed relatively strong and combined with lower corn prices ethanol profit margins are pretty good.  This is also a big improvement from last year when profit margins were negative due to high corn prices and even the major ethanol producers were lobbying Washington to temporarily relax the mandate.  This year ethanol demand has been strong to this point.  Total ethanol production is currently at its highest since late 2011 while at the same time ethanol stocks are at the lowest level in over 3 years.  This is a great sign of strong demand and while it remains to be seen what the impact will be from the EPA proposal logic would reason that an increase in production, a decrease in stocks and good profit margins are the right recipe for strong ethanol demand in spite of the EPA.  

For the moment corn may not be done putting in lows, but if export shipments start to catch up to the strong export sales and ethanol demand remains strong despite the EPA proposal there is a very good chance that we have seen the biggest carry over number from the USDA that we will see this year.  If the USDA increases export and ethanol demand and lowers carry over numbers it could mean the worst news is behind us.  However, and this is a big one, we need to temper our expectations.  The fact remains that we are looking at one of the biggest corn carry over numbers in recent history and it is highly unlikely that stronger export and ethanol demand alone would turn the balance sheet from a big surplus situation to a tight stocks situation.  At best corn could get into the low $5.00 territory unless there is some big unforeseen game changing event.  But with corn prices as low as they are producers are not in a hurry to sell.  Plus there was a lot of empty storage going into this harvest due to the drought and high prices last year so they can hang on.  It may take higher prices to get corn moving later in the marketing year, especially before we know what next years crop will look like...  Next year could be a completely different story, but as I said earlier lets focus on the positive for the moment.  

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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:

January 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 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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COMMENTS (1 Comments)

Baileigh - WY
So there is one thing I am particularly confused on with this; that is if ethonol is reaching highs in production, how is the mandate not going to affect the corn industry. It was said that exports were also on the low end. So how exactly are corn producers going to be able to sell all of their crop and still make a profit out of this?
8:42 PM Nov 21st
 
 
 
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