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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.

Beware the Trap of Switching Corn Acres to Soybeans

Mar 14, 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.   

In the last few months the market has seemingly worked hard to "buy" soybean acres at the expense of corn.  The last few trading days has started to correct this situation, but if you are only looking at the big board it is pretty attractive to think about switching some corn acreage to soybeans.  I urge you to take some other factors into consideration.

Of course the rotation needs to be kept up, and by no means am I advising guys not to plant soybeans but I do think that price action over the past few months has tried to trick us into planting more soybeans.  The fact of the matter is that the soybean market has stayed strong due the window of opportunity for US exports being extended by a slow moving Brazilian machine.  It just happens that Brazil is taking its time and keeping soybeans elevated to keep prices high as they enter the global export market.  This also inadvertently comes at a time where US producers are making planting decisions for the upcoming growing season.

The pitfall here is that the market might be enticing US producers to plant more soybeans when it does not need to.  The market does, and is trying to encourage South America to get their act together.  But many producers may be misinterpreting the relative strength in soybeans so far this years as an opportunity for the next growing season when it is most likely not.  It is an easy misunderstanding to make.  Markets move when they want something, for example the sharp rally this summer was because the market wanted to price ration demand.  Some years at this time of year corn or soybeans will rally in attempt to "buy" acres, but this year it is not the case.  This year the market wants the huge South American crop to hurry up and take its place in the world export picture and take the pressure off of a tight US balance sheet.

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

The price outlook for soybeans for the next growing season is pretty bleak in my mind.  South America has a monster crop.  On top of that it sounds like China has overbooked their soybean meal needs and may be away from the market for a while.  In the mean time there are also signs that their economy may be slowing down as well possibly slowing their demand anyway.  And then yesterday we hear news that Brazil eliminated a tax credit for domestic soy oil.  This reduces their crush margin and encourages them to export more soybeans.  Have no doubt about it, Brazil is going to flood the global market with soybeans in the coming weeks and months.

The wild card is always weather.  Sure, it is a possibility that there is another major drought this summer.  And in that case we would certainly see domestic soybean prices rally sharply.  However, South America has huge soybean stocks and relatively small corn stocks.  This means that corn should be the biggest gainer if we have a repeat of last year.  Droughts can be a funny thing though, in the sense that they can kill one crop but another might just get the timely rain needed to pull through.  It is possible, however unlikely that we have a corn crop next year and the soybeans fail.  This is about the only way I could see soybeans having a large price advantage come harvest time.

Overall I want to caution producers about making big switches in acreage from corn to soybeans.  Do not misunderstand this market, it is not asking for more soybean acreage it is asking for South America, Brazil in particular, to get their butts in gear.  And if you do make the switch, be very aggressive marketing current price levels.  Use this South America bump to lock in profit margins.  Producers should be doing this right here right now for soybeans anyway.  And, as always when we have some upside potential with a growing season yet to go I would recommend using a strategy that would allow producers to lock in a price floor while still having a chance to participate in higher prices, at least to an extent.  I can show you how if you like. 

Sign up for our Morning Ag Comments: http://www.zaner.com/offers/?page=17

December Corn Daily chart:

November Soybeans 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 new crop corn near $5.60 and soybeans near $12.50. 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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