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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.

Markets Brace for the USDA Report as Wheat Makes New Lows

Jun 27, 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.        

This USDA report on June 28th is shaping up to be one of the biggest reports of the year.  It will likely set the tone for months to come.  In front of the report corn and soybeans were mixed and choppy with some strength in old crop July contracts and weakness in new crop.  Wheat set new lows for the year amidst spring wheat harvest pressure and lack of bullish fodder.  The report tomorrow will address to burning questions in the market - Old crop supply and demand, and new crop acreage.  

The USDA will release quarterly grain stocks which will tell us two things - 1)  how much corn, wheat and soybeans we have until we harvest the new crop.  2)  how strong demand has been in last quarter.  This is more of a big deal this year then in most because of the major drought last year.  With the issues growing the crop last year markets pushed to new record highs on thoughts of historically tight balance sheets and the need to price ration.  Since then however, it seems demand has fallen apart and suggested that the record high prices price rationed better then anticipated.  Tomorrows report will give us a much better picture of where we stand going into the last quarter of the marketing season and give us an idea of whether markets need to rally to slow demand or fall to encourage more demand.  Cash prices have been strong for corn and soybeans as producers have been unwilling to sell at current prices.  This report will either justify them if stocks are tighter then expected, or possibly cause a sharp uptick in cash sales if stocks are higher then expected.  

The USDA will also release planted acreage numbers which will give us insight into the potential supply situation for next year.  This is also more of a big deal this year then most as most of the grain belt has seen a cool temps, excessive moisture and late planting.  It is mostly agreed that there have been some acres that have gone unplanted, mostly at the expense of corn.  The argument lies in how many acres did not or will not get planted, and if soybeans gained or lost acreage in the mix.  Once the USDA releases their planted acreage number it will be the number they use until the final harvest report in November.  Market participants can and this time certainly will argue with the numbers the USDA lays out, but the fact of the matter will be that these numbers are what the market will have to trade until after harvest, and these numbers will be what the USDA bases its balance sheets off of for months to come.  

One way or another this report should be a market mover.  If I had to take a guess, gun to my head, I would think that this report might not be as bearish as expectations but still represent bearish numbers long term.  It seems to me that there are so many bearish ideas out there for this report that maybe it ends up not being as bad as our worst fears.  Keep in mind that the last stocks report came out 400 million bushels higher for corn and sent the market on a mission to push limit down for the next 3 trade sessions.  Traders remember that, and I think there has been a lot of covering of long positions in front of this report and maybe some overly bearish expectations.  If there is not a big bearish surprise then there could be a bit of a relief rally short term, but in the end I do believe the USDA puts out numbers that add up to bigger old crop ending stocks and potentially huge new crop ending stocks.  

We are holding on to short hedges and adding some low cost short term upside protection.  This also adds exposure to the Sep-Dec spreads which could widen significantly to the Sep on a rally.  With late planting we would assume harvest delays could push the September contract more toward old crop fundamentals.  If this is the case the $.34 premium in September over December could move closer to the relationship of July - December which is at almost $1.30.  Feel free to call or email me if you would like more details.

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

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