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.
The August USDA report came out as a big surprise, and as usual when the USDA gives us a surprise there are many people crying foul. Markets were sharply higher on the unexpectedly bullish report, but as the dust settles grains are trying to break out in different directions. So in the aftermath of this report what can we make out of it and where do we go from here?
The USDA shocked the market by lowering corn and soybean yields, soybean acreage and US carry over numbers. The trade was looking for lower soybean yields, but ending stocks came in significantly lower then expected. For corn the trade was looking for an increase in yield and carry over while the USDA apparently had different ideas, lowering both. And as usual when the USDA has something different then the trade estimates there are lots of people from all over the place saying the USDA is wrong. So far this year we have seen similar complaints with prospective acreage, planted acreage, at least 2 of the quarterly grain stocks reports, even crop progress and now this. Now I am not saying that the USDA is right, and I'm also not saying that are wrong but I've said it before and I'll say it again - these are the numbers we have to trade.
This time I find it pretty interesting that some large funds have stepped out and said that the USDA is off their rocker. That's funny, these are usually the guys we assume are paying the USDA to fiddle with numbers. Maybe the check bounced... All kidding aside, it appears no one is immune to being wrong from time to time. This time, I do tend to agree with most people that are saying that the USDA got it wrong. I agree that their reasoning and using a 5-year average is suspect. This year sure feels quite unique from any of the last five years not to mention that last year should be thrown out as a statistical outlier. But, if you have been following my scribblings you know that I have been expecting lower yields come harvest, I just don't get the USDA's train of thought for this report. Crop conditions are good but crops are behind. To me that would have been the perfect recipe for a "wait and see" approach for the USDA. Anyway, I know I sound like a broken record but - these are the numbers we have to trade.
The bottom line is that even with a 122 million bushel reduction in ending stocks in corn the carry over is still 1.837 billion bushels. So what is the difference between a 1.837 billion and a 1.959 billion bushel cary over in corn? Well, 122 million. Duh... Sorry, I seem to be in a mood today... The point is that huge is huge and 122 million seems like nothing in comparison. Price wise, I'm not sure there is a difference.
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For soybeans a 75 million bushel reduction ending stocks is a big deal. This represents a 26% reduction in US ending stocks. And, at face value this is a game changer for soybeans. However, after digging into the report a little more and realizing that the world carryover for soybeans actually increased despite the lower US number things do not seem so concerning. There are a lot of soybeans in the world today. At some point the stocks in South America need to get moved on a large scale. So I have to wonder if 220 million bushels is the tightest balance sheet we are going to see from the USDA. Also, 220 million bushels is not much, but running on tight ending stocks in soybeans has kind of become the norm in recent years and it is certainly more comfortable then the 125 million bushels last year. So this report may have elevated the floor in soybeans a bit at least until we begin to import South American soybeans on a larger scale.
On a side note, what are we going to have to do to get the USDA to move major reports to an 8 AM CST release time? This trading through reports business is dangerous and frustrating. There are computers that get and trade the info before any human has the chance to see it. I do get that there are lobbyists for hedge fund traders out there making it tough for the USDA to make a change, but actual human beings have to count for something right? USDA please come to your senses and release reports during the 45 minute pause in the morning so that we can read the report, have a cup of coffee and think for a second before everything goes nuts. Remember the good old days?
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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 while we have corn near $5.00 and soybeans near $12.00. 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 email@example.com
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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.