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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.

What is the Real Deal on US Soybean Imports?

Apr 10, 2014

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.     

On the April 9th USDA WASDE report the USDA finally increased export demand to reflect the record pace of soybean export sales and shipments.  The 50 million bushel increase in soybean exports was partially offset by a 30 million bushel increase in imports as well as slight reductions in crush and residual.  With the USDA now estimating 65 million bushels in imports this would be a record amount of soybeans imported in to the US.  But how accurate is the USDA's estimate?  

In the notes of the Executive Summary of the USDA's April WASDE report the USDA stated that they were increasing imports to a record 65 million bushels based on trade reported through February and the expectation of shipments from South America in the second half of the year...  First of all, we would love to see what the trade reported through February was as well as how and by whom it was reported.  As it stands the USDA does not have a reporting system in place to account for soybean exports.  So how are they getting these numbers?  It would be very helpful to know and would add more transparency to their reporting methods.  The last few years and this year in particular highlight the need for an import reporting system.  It is rather likely that soybean imports to the US will continue to grow in coming years and it would be nice to know that the USDA is not just pulling numbers out of thin air or just using whatever plugs into their balance sheets.  And, if they do have some sort of reporting system from which they got import data through February why are they not making this public.  If I were a betting man I would say if that had something we would have seen it.  Saying it is there doesn't mean it's there, but this seems to be a concept lost on the USDA.  

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

Secondly, if there were measurable imports coming into the US through February then where were they coming from?  On a good year some areas in Brazil are able to get out into fields and start harvesting in early February, most areas are still weeks if not months away and Argentina usually doesn't get going until the beginning of April.  So, are we talking old crop South American soybeans here?  If this is the case it would stand to reason that there will be or maybe already has been a lot more where that came from (literally) as new crop supplies become available.  Another thing is that soybeans hadn't traded above $13.25 until the second half of February.  If South America was selling us old crop soybeans at $13.00 what do you think they are thinking at $15.00 just as they are sitting on a pile (again literally) of newly harvested stock?  

The question is - with a lack of USDA reporting system for imports who would be telling us what is coming in?  It would have to be commercials but here is where the problem lies.  Some late season hot and dry conditions had the soybean market at a steep inverse going into harvest.  Spreads were asking producers to sell soybeans off the combine and store corn and to a large extent this is what happened.  So, the majority of last year's soybean crop lies in the hands of the commercials at this point.  So, if they own the soybeans would they want to divulge news that would very likely put pressure on prices?  Probably not.  At this point commercials could be buying South American soybeans, shipping them to the US and selling them at higher prices with the market having very little knowledge of this.  In fact there have been many rumors of large soybean imports and even in some cases shipments of South American soybeans coming into the US only to turn around and get sent to China.  But again, without any sort of reporting system we have no way of knowing what is true and what is not.  The March 31st stocks report was likely too early to reflect much in the way of imports, but the June 31st quarterly grain stocks report could have a surprise waiting.  

Ultimately, we may never know how many soybeans were imported in the US this year.  The USDA should do something to address this for years to come.  The interesting thing is that if we are looking at a tighter soybean carry over then last year why is basis not reflecting this?  Either way, this may not really matter at the moment anyway.  For now funds have found a bull market to exploit and will likely continue to do so until they decide to get out.  This could continue to push soybean prices higher despite what many, if not most, analysts see as a bearish fundamental backdrop.  And who knows what the funds have planned.  In the long run this could be bad for markets because demand may suffer at higher prices and this could be setting markets up for a sharp drop at some point in the future, but for now the name of the game is follow the money flow.  

Sign up for our newly renovated Morning Ag Hedge newsletter!  If you have signed up previously there is no need to sign up again, you should be receiving it.  Sign up here: http://www.zaner.com/offers/?page=17  

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.     

May Corn Daily chart:

May Soybeans Daily chart:

May 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

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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