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.
What We Need to Take Away from this USDA Report
Mar 28, 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.
I am sorry for the delay, it has been a crazy day...
Today will be one of those days I remember for the rest of my career. It seemed every one was expecting a bullish Quarterly Grain Stocks report it was just a question of how bullish. Ideas of greater then expected feed demand and an extended window of opportunity for US exports fueled the bullish fire that rallied corn and wheat over 50 cents off of lows. Then the USDA changed the grain world. Certainly the surprise the USDA gave us today added to the sharp sell off in grains but the gravity of this report remains - this is a game changer.
After the USDA made the move to increase feed demand 25 million bushels on the March report the market seemed to think that this was a beginning of a trend and that growing feed demand was going to continue to shrink the already tight ending socks for corn. Never mind that cattle on feed has continuously been at its lowest point since reporting started in 1996. The market took this information and ran with it.
As it turns out, socks were significantly higher then anyone had thought. Corn stocks came out almost 400 million bushels above the average trade guess and 150 million bushels above even the highest estimate. Soybeans stocks came in 65 million bushels over the trade guess and 16 million over the highest trade estimate. Wheat was 46 million over the trade guess and smack on the highest estimate.
On top of the shockingly bearish stocks numbers we are left with some disturbing thoughts. Feed was supposed to be the one strong point in demand. Exports and ethanol demand has been lagging the USDA projections. In particular, corn used for Ethanol is consistently 3-4 million bushels per week below the pace needed to reach the current USDA projection.
Making matters worse, corn was down 7-10 cents going into the report on rumors that 5-6 cargoes of Argentinean corn was on its way to the Gulf. This is a bit surprising because Argentina is not very far along in their harvest so this is likely to be coming from their old crop reserves. So, if they are willing to sell old crop at these prices they sure would like to sell new crop too. Now, today' drop in prices may dissuade some imports but the recent strength in the US dollar could continue to incentivise US end users to look south to fill their needs.
Sign up for our Morning Ag Comments: http://www.zaner.com/offers/?page=17
Soybeans had been supported by Brazil's slow start to their exporting season and the idea that the window of opportunity for US exports would remain open longer then we had planned. In hind sight we had to realize that this was a temporary situation and a temporary effect on the market. The longer term reality is that South America has a massive amount of grain that needs to be absorbed by the global market. We can see the effects of this already as old crop soybean sales dropped to next to nothing this week. At this point, old crop US soybean exports will likely be quiet until after harvest.
Planting intentions were in line for corn and wheat and a little bullish for soybeans but with the stocks we have on the diminished demand structure it begs the question of whether we need to plant so many acres. Now, we still have to grow a crop and some places are still a bit dry but if yield fall +/- 10% of trendline it seems that the market will have to work to buy demand back. With land values and rents sky high it would seem that another agenda of the market will be to price out some acres. This will likely happen by pushing grain prices low enough to force some producers out of the business in the next couple of years. After seeing this report you have to wonder if this will happen sooner then later.
I do not write these words to scare anyone, the sharp drop in prices today did that. And in this case fear may be good. Many times fear teaches us a lesson. One of my favorite people has a saying - "I'm a greedy pig, but I scare easily". As funny as it sounds, this is a good way to approach your marketing. Be bold when you have the tiger by the tail but be very protective when risks add up. At this point we find ourselves in the position of the latter. It is difficult to make the transition but it is absolutely key to survival. I urge you to take a long look at your operation and your profit margins and protect what you have worked so hard for. Do not be one of the producers that the market seeks to price out of business. Feel free to call me if you want to talk about your plan. If not that's fine, but please call someone if you don't have a plan. In this market climate it has become an essential part of your livelihood.
CME Options On Futures: The Basics: http://www.zaner.com/offers/?page=9&ap=tseifrie
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 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 email@example.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
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