TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND MAY 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.
After seeing the updated USDA carryover numbers on last Friday's report, it occurred to me that we were not looking at the lowest soybean ending stocks numbers we have seen from the USDA in the last five years. So I had to do some digging back into old reports, which thankfully are kept on file by the USDA (our tax dollars at work). And there are some interesting comparisons that we can make to give us perspective on our current situation. A major note here, though -- our economy has been on a pretty wild roller-coaster ride in the last five years and it would be foolish to not take that into account as well.
For this exercise, I am looking back at the September USDA reports. Here is what the projected U.S. and world ending stocks numbers were:
2008/2009 - US - 110 million bushels / World - 40.22 million metric tons
2009/2010 - US - 150 million bushels / World - 62.85 million metric tons
2010/2011 - US - 225 million bushels / World - 68.82 million metric tons
2011/2012 - US - 145 million bushels / World - 51.94 million metric tons
2012/2013 - US - 115 million bushels / World - 55.66 million metric tons
As you can see, we were looking at a slightly tighter U.S. and significantly tighter world carryover in 2008/2009. Leading up to this, we saw soybeans rally to their previous highs of $16.63 placed back in July 2008, but by the time this report came out in September of 2009, soybeans were back below $11.00. There was another significant change that happened in this time frame as well -- the S&P 500 Index saw a precipitous drop starting in mid 2008. This sharp turn in the American economy certainly helped push grain prices lower than the balance sheet would have suggested.
Fast-forward to 2012 and according to the USDA, we find ourselves in a similar situation as 2008 as far as U.S. stocks; however, the world outlook is not nearly as tight. And, after five years, the S&P 500 is inching back to pre-2008 crash levels. The fact that the S&P 500 is getting back to where we were five years ago is impressive given the general weakness of the overall U.S. economy, but it is very unimpressive considering the growth that we should expect over a five-year span. Overall, the economy remains a concern, and consumers are much more cautious and price sensitive than in 2008.
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I feel it's pretty safe to say that given the balance sheet the USDA is showing us and given the current economic situation, we should see soybeans put in a high plus or minus 50 cents off the previous July 2008 highs (plus 50 cents based on inflation, minus 50 cents based on a more comfortable world carryover). So far, soybeans have bested the July 2008 high by $1.14.
It very well may be the case that the USDA will have to lower average yield numbers or harvested acreage or both, so we could end up with a balance sheet much tighter than in 2008/2009. And, even if the soybean numbers stay the same and the corn balance sheet gets even tighter, the beans could go along for the ride. Also, it seems unlikely that we are set for a major stock market crash again, mostly because we are not as strong as 2008. But (yes, there is a "but," and it's a big one) if this is as tight as the balance sheets get for corn and beans and South America produces at least an average crop, we could see some pretty significant downside potential from were we stand currently. Look at the continuation chart and see how much we have come off highs in the past. Or just look at where November 2013 soybeans are.
With the recent beneficial rains for soybeans and the potential for a massive South American crop with record acreage, I would be a little nervous about prices up here. Yes, South America could have another major drought year, and corn could pull beans higher, but these are big what-ifs that I prefer not to risk. I would much rather use an option strategy that leaves some room for upside potential yet gives me a floor at or near current prices.
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Or just let me know and I can show you the strategies that we are using. Have a great day!
November Soybeans Daily chart:
Continuous Soybean Monthly chart:
Continuous S+P 500 Index Monthly chart:
All this means that speculators should be looking for opportunities and producers need to look to lock up some prices while we have new crop corn near $8.00 and new crop soybeans near $16.00. 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 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.
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?rid=Seifried
Futures, options and forex trading is speculative in nature and involves substantial risk of loss. 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