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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.

USDA Puts Grains on the Defensive

Dec 11, 2012

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 December USDA report this morning was slightly bullish for corn and soybeans and decidedly bearish for wheat.  On the release of the report corn and soybeans rallied while wheat pushed lower.  Soon after the pressure in wheat spilled over to corn and then soybeans dragging the grain complex lower.

For corn the USDA left the balance sheet unchanged from last month with ending stocks coming in at 647 million bushels.  This was initially seen as supportive because the trade was looking for an increase in projected stocks and it did not come.  It is widely believed that the USDA is currently overstating export demand and also possibly ethanol demand.  As the day wore on with the heavy pressure in wheat the corn began to come down as well.  Traders began to think that maybe the USDA is still going to lower demand and increase ending stocks on the January report and they are just taking another month to continue to gather data.  Based on the numbers from the short marketing season so far it seems that export demand could come down 60-100 million bushels if sales remain poor.  Ethanol could also be reduced 20-60 million bushels if weekly corn usage does not pick up from current levels.  Ethanol stocks remain well above last year suggesting little need for an uptick in production.  From a world perspective the USDA lowered Argentinean corn production very slightly by .5 million metric tons.  This was less then some expected.  On the other hand the USDA increased China's corn production by a whopping 8 million metric tons.  This is a huge increase and could help to explain why China has not been an active buyer of late.

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

Soybeans enjoyed a 10 million bushel decline in ending stocks to 130 million bushels.  The lower stocks figure was a result of a 10 million bushel increase in crush demand.  This came as a bit of a surprise as many traders were expecting the decline to come from increased export demand as exports have been strong in recent weeks.  Either way, with a tightening stocks number and an announcement of 2 cargoes sold to China this morning soybeans were able to stay relatively firm despite the weakness in wheat and corn.  We do have to wonder if it is a bad sign that soybeans posted a lower close on what was supposed to be a bullish report.  Soybeans have rallied over $1.20 off of lows in the last month on ideas of stronger demand so much of this report may have already been factored into the market.  This could be a little of the buy the rumor sell the fact type trade.  This leaves us with the question - was this report bullish enough to justify an new leg higher in this soybean rally?  With strong resistance overhead soybeans will need to see continued strong export sales and maybe throw in a little more weather concerns for the South America crop.  The USDA did not lower production estimates for Brazil or Argentina as some thought they might after some late planting due to wet conditions.  If South American weather stays in a beneficial El Nino pattern there could be mounting pressure on the soybeans.

Wheat had the most dramatic report of the lot with the USDA increasing ending stocks by 50 million bushels.  The trade expectations were for a modest increase of 14 million.  So, the large increase came as a surprise.  The USDA also increased the world ending stocks by 2.8 million metric tons.  The continued drought conditions in the plains and talked of banning wheat exports in Russia and Argentina are bullish aspects of the market however, global demand seems to be waning and ending stocks remain large.

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If all goes well in South America the global export market will be flooded with cheaper SA soybeans.  With corn demand being as poor as it is corn could also need to lower prices to buy some demand.  You have to wonder where corn and wheat would be if it were not for the strength in soybeans and what would happen if the soybeans reverted back to a bear market. 

March Corn Daily chart:

January 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 above $7.00 and soybeans near $15.00. 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=Seifried

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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