The Ted Spread
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.
The Dilemma Grain Hedgers Face
Jan 24, 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.
The last year has a lot of guys scratching their heads about what to do with next years crop. It is a really tough call right now as to which way grain markets go from here. Will South America bail the world out of tight balance sheets? Will global demand pick up? Will we run out of old crop corn and soybeans? Will the US have another major drought this year? So many questions and not many answers this time of year. The biggest problem now is that grains are well off highs and producers who have not locked in higher prices are feeling pressure to do something or risk lower prices. Yes, many of us are banking on the idea of a summer rally due to tight old crop stocks and continued dryness.
In a perfect world grains would go back to highs in the early spring on dryness and tight balance sheets and everybody sells $8.00 plus corn, $17.00 plus soybeans and the rain comes and we all produce a big crop. The fact of the matter is that this is an extremely unlikely scenario. We very well might produce a good crop this year, we sure are due for one, but getting grain prices back to last summers highs may prove to be a difficult task. As South America moves closer to the finish line with record corn and soybean crops it starts to seem more and more likely that not only does the global ending stock situation become less tight but the US ending stock situation could also become much more comfortable.
It is a scary thought, but what if South America not only prices the US out of all exports but also prices the US out of some domestic demand as well. Meaning we could very well see some US end users import cheaper South American corn and soybeans. Hey we saw this happen to a small extent already in their last marketing season. Now, if South America harvests record crops while US has high domestic grain prices what is to stop the flow of SA product from coming into the gulf and the Carolina's?
This may or may not be a possibility. I throw it out there to make a point. Yes we all want to see higher prices to sell, and we are comfortable telling ourselves to wait for higher prices to sell. But, what if they never come?
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That being said, I certainly would also love to see higher prices to sell. After all it is my job to try to help my clients sell at the highest prices we can get. The key there is - "that we can get". I have to do my best to protect my clients and I feel that right now there is way too much to loose to sit and wait and hope for higher prices. On this last rally in the grains I have been able to get some good pricing on some options strategies that allow me to put a floor in close to current prices while giving me some upside potential on a summer rally. At least I know I'm not going to be much worse off then here and I could still do better. I will tell you what, it sure helps me sleep better at night knowing I have defined my worst price scenario. At least it helps me sleep better then the dream of another summer rally that may or may not turn into reality.
And as a an added bonus I came up with a fun little old crop new crop option spread that takes a lot of my rally risk off the table. You can thank quiet markets for that brain child. What I am doing here is an old crop call spread that is 30 cents out of the money while selling new crop calls 95 cents away. The thought here is that if we do rally on tight supplies or dryness going into planting it will come up front, and my old crop calls already have a 60 cent head start. So, as long as a rally comes from the front we should have made close to a dollar on old crop well before our new crop calls get near the money. This works great to hedge some new crop hedges and can add to your average sold price, but it also could work as a speculative play. Let me know if you have any questions or would like more details. Have a good one!
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March Corn Daily chart:
March 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 near $7.00 and soybeans near $14.00. 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 firstname.lastname@example.org
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