Jul 11, 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.

Sell the Bounce in Grains, or Wait for Higher Prices?

Jul 09, 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.        

In the last two days corn, wheat and soybeans have had a nice bounce off their lows.  I was sitting here last Friday as grains were making new recent lows wondering when the market would catch on to this hotter, dryer forecast.  It seems that on Friday most of the guys who pay attention to weather or grain fundamentals were away from the markets and the fund traders were selling any commodities they could because of the higher US$.  Now that the trade has returned we see a hotter, dryer forecast and up we go.  But, is this a bounce to be sold or a new trend higher?  

Weather will have a big say in that.  If it does not rain again for 3 months then we are due for some higher prices.  However, if we do get some timely rains we may be looking at the biggest carry over numbers we have seen for some time, especially in corn.  If this is the case we may need to see lower prices in order to buy back some of the demand that was lost during last summer's trek to record highs.  This could be more difficult then we would imagine.  A lot of it has to do with global economics and currencies.  I know, I know I just lost half my readers because I'm not talking about grains but really I am.   

You see, it was much easier then we expected last summer to ration demand.  We certainly needed to ration demand last year because of the drought but it happened faster and at lower prices then we were all expecting.  A lot of that has to do with the fact that the domestic and global economies are not as healthy as in the past and therefore are more sensitive to price increases.  For example, in 2008 when grains were pushing toward record highs it was tougher to price ration demand because economies were doing well and the end user or consumer was much less price sensitive.  Everyone was willing to pay up for what they wanted.  Now however it is a much different climate, as we are tightening the belts on a global scale.  So, just as it was easier to price ration demand then expected it very well may be more difficult to get that demand back.  It could happen slower and at lower prices then expected especially given the recent strength in the US$.  

As far as the High Pressure Ridge or "dome of death" is concerned.  It is a great reason to bounce off of lows, especially in the middle of July.  It does pose a threat to corn pollination and will cause damage in some areas.  However, from what I see that damage could be minimal.  Most importantly not all of the forecast models agree with this High Pressure Ridge setting up camp over a big part of the growing area.  Most forecasters agree that we will see timely rains and that stress will be minimal to the majority of crops.  But, the timing is right to get a rally from a weather scare and the charts were due so here we are, but I believe it is unlikely to be a change in the overall direction of the markets.  It may just be one last opportunity to sell above $5.20 corn and $12.75 soybeans for some time.  

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For the remainder of this growing season it seems that we must be concerned that corn, wheat and soybeans have the potential to see lower prices.  The USDA planted acreage number for corn came in much, much bigger then what we had all guessed.  We can argue about it until we are blue in the face, but the fact remains that this is the acreage number that the USDA will use for their balance sheets until after harvest.  That certainly sets us up for some very big ending stocks numbers going forward.   

Yield now becomes the biggest question to determining production, and this may be where the USDA makes up for the much larger then expected planted acreage number.  Remember, the USDA has already lowered their original yield estimate by 1.5 bushels an acre for corn.  This could be a trend and could shrink ending stocks a bit.  And, the smaller then expected quarterly grain stocks number could mean there is more demand out there and could justify higher demand numbers from the USDA which could also shrink ending stocks a bit.    

However, with corn and soybean conditions in the upper 60% range in the good to excellent category and demand indicators continuing to disappoint is seems impossible for the USDA to give us ending stocks numbers that could be anything but bearish going forward.  Yes, maybe the July report will not be as bearish as our worst fears and we might get a bullish reaction to it but in the end the number will be bearish longer term.  

Producers should be thinking about pricing on bounces from here on out.  Some of the strategies we use allow for some upside potential to capitalize on a rally while still offering a price floor.  Please feel free to give me a call or shoot me an email if you would like to talk about your marketing plan.  The last few years no marketing plan has been a good marketing plan, but this does not seem to be one of those years and the guys who are able to see that may be greatly rewarded.  

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

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 $5.50 and soybeans near $13.00. 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

Sign up for our Morning Ag Comments: http://www.zaner.com/offers/?page=17 

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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