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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.

Possible Yield Scenarios for Corn

Jul 18, 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.        

On the July USDA WASDE report the USDA stayed firm on corn yield at 156.5 bushels an acre. There has been some talk about that yield number being too high due to some hot and dry conditions in some areas during pollination.  So, we wanted to see how lower yield numbers would effect the balance sheet.  For now we are using the current USDA demand structure, harvested acreage number and beginning stocks.  

First off we would like to mention that currently the corn crop at 66% good to excellent and slightly above average so yield reductions may not be necessary if timely rains were to fall in the drier areas.  But, we wanted to see what would happen if the rains did not come.  So, we will start with a 2 bushel an acre reduction and work our way up to what we see as a worst case scenario 10% or 16 bushel an acre reduction.  Here are ending stocks numbers based on lower yield figures while leaving everything else unchanged:  

Current USDA Estimate - 156.5 Bu/acre = 1.959 billion bushel ending stocks

154.5 Bu/acre = 1.775 billion bushels

152.5 Bu/acre = 1.597 billion bushels

150.5 Bu/acre = 1.419 billion bushels

148.5 Bu/acre = 1.240 billion bushels  - This would represent a 5% reduction in yield

146.5 Bu/acre = 1.062 billion bushels

140.5 Bu/acre = 528 million bushels  - This would represent a 10% reduction in yield  

So, from these numbers we can see that even a 10 bushel an acre reduction in the national average yield would still result in over a billion bushel carry over given the current USDA balance sheet.  If we would see a full 10% reduction in yield ending stocks would cone in slightly over a half a billion.  This would most likely be the absolute worst case scenario and with corn conditions at 66% good to excellent as of July 15th it seems highly unlikely.  

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

Now, all of these possible scenarios are based on the current USDA harvested acreage number.  In July the USDA actually raised the planted acreage number by 100,000 acres which shocked the market.  Most felt that with the wet and cold spring a lot of acres did not get planted.  The USDA did however reduce harvested acreage by half a million acres reflecting weather conditions.  Some feel that the harvested acreage number is still too high.  Unfortunately the USDA will continue to use their current number until after harvest.  If it were to change it would effect the balance sheet, but that will not be an issue until at least October or November.  A possible answer to why the USDA planted acreage number was so high is that the USDA had been off on their original planting intentions number by close to 2 million acres and that in fact planting intentions should have been 99 million or more.  

The other issue some have with the current USDA balance sheet is that demand estimates may be too high.  Currently the USDA is looking for 700 million bushel increase in feed demand.  It is very difficult to justify this as cattle on feed numbers remain depressed and there is much more pasture this year.  The USDA is also looking for a 1.0 billion bushel increase in exports.  Lower prices would likely bring more export business, but that is a huge jump.  

So, it seems that if there were much of a reduction in yield the USDA has built in some wiggle room for ending stocks.  For example, if there was a 5% reduction in yield ending stocks would be 1.240 billion bushels under the current balance sheet.  However, if you take back 300 million bushels from feed (still a 400 million increase from last year) and 300 million bushels from exports (still a 700 million bushel increase from last year) we are right back to a 1.840 billion bushel carry over.  

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The point here is that although the USDA may have to lower the yield number in months to come be careful about getting too bullish.  It seems the USDA has built in room for lower yields in their balance sheet by increasing demand numbers more then a realistic amount.  

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.    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

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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COMMENTS (1 Comments)

BirdogJessieJoan - Atlanta, MO
Something to keep in mind, if the weather causes a yield reduction the USDA may have to print a few hundred million bushels out of thin air to ad to the supply and the carry out to keep the grain prices under control.
9:11 PM Jul 18th
 
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