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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 USDA Predicting a Farm Land Bubble Burst?

Feb 14, 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.   

Going back to the USDA Baseline Projections released on Monday there were some interesting numbers going out a few years and I want to take a deeper look at some of the figures.  First off it is important to note that these Baseline numbers are a wild shot in the dark.  Just like you or I the USDA has no crystal ball (or if they do it is really cloudy), and these particular numbers were established last November.  Case in point, last year the USDA was looking for a 1.8 billion bushel carry over for corn this year.  We all know what happened with that.  Even still, there are some interesting things the USDA is looking for over the next 10 year period.

First of all the USDA is very bearish for the coming growing season.  Even back in last November with the drought fresh in everybody's memory the USDA was looking at a 2 billion plus bushel ending stocks number for corn in 2013/2014.  They are also suggesting a $5.40 a bushel average farm price for corn.  These numbers do not jive for me.  I think that if we do end up with a 2 billion plus ending stocks number for corn this coming growing season we will see sharply lower prices in effort to buy back demand and cut back acreage.  Yes, I said it.  We could be one good growing season away from the market pushing for less acreage.  But, we have to grow it first and as we saw last year that can not be taken for granted.

What is extremely interesting is what the USDA is projecting going out 3-4 years.  The acreage numbers they are looking for in 2015/2016 are shocking to me, for two reasons.  First, it makes the USDA seem to be capable of forward thinking and second because it showed some understanding of basic economics.  Not to bash the USDA, but much of the time these numbers seem to be contradictory of what is actually going on in the market.  In this case they could be dead on.

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

For 2015/2016 the USDA is looking for 86 million acres planted for corn, 75 million acres for beans, 51 million acres for wheat.  This is a sharp reduction in acreage over all.  From current private estimates for 2013/2014 this would be almost a 13 million acre reduction in corn, a 5 million acre reduction in beans, and a 6 million acre reduction in wheat.  A total reduction of upwards of 24 million acres in 2 seasons!!!

So why is the USDA assuming such a drastic decline in acreage?  A big part of it is that they see sharply lower on farm prices for grains.  But that alone does not justify such a massive drop.  Is the USDA taking into account record high land sales?  Are they assuming that lower grain prices will not only cut out some "fringe" areas but also weigh heavily on farms in good areas that have just paid too much for land?  This might seem to be too big of a step in the USDA's analytical skill set, but it certainly is scary to look at.

In the end, these are again just a shot in the dark by the USDA.  Who knows what weather has in store for us, or maybe there will be huge strides in biofuels that will breed sharp increases in demand, or maybe South America is over run with rust or aphids.  The point is who knows?  Probably not the USDA.  But it has to make you think.  After all, what is the saying - "even a broken clock is right twice a day".

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***One final note on the subject.  Two weeks ago at the Top Producer seminar there was a keynote speaker that when I saw him on the agenda I scratched my head and wondered why he was there and what he would talk about.  He is a professor at University of Chicago Economics and he had authored some books about freaky economics and spent a lot of time doing studies on inner city gangs and such.  As it turns out he was pretty entertaining, but had nothing to do with farming.  And then, they opened the floor to questions and one brilliant individual asked something like - "do you think there is a bubble in land value?".  He admitted that he knew nothing about the subject, however he went on to say that it would occur to him that a key sign that there is a bubble and that it is about to burst would be if there were people buying that had no business doing so.  Now, I am convinced he really knows nothing about the subject but what he describes is absolutely happening right now.  There are wall street types out there buying up land to make a quick buck and driving prices up.  Maybe he knows more about the subject then he thinks...

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 while we have corn near $7.00 and soybeans near $14.00. 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 tseifried@zaner.com

Please check out my Blog at: http://tedseifriedfutures.com/

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

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