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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.

How Bullish Could Next Thursday's Grain Stocks Report be?

Mar 21, 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.   

Corn and wheat have had a nice 50 cent rally in the last 2 weeks.  Much of this is coming off of the better then expected feed demand on the March 7th USDA report.  There are a lot of talking heads thinking that the increases that the USDA made are just the tip of the iceberg and that the March 28th Grain Stocks report will show greater demand then previously anticipated.

It seems to be widely agreed that feed demand is stronger then current USDA projections, however it is unclear if corn or wheat is the bigger benefactor here.  Traditionally higher feed demand would go to corn, but with old crop corn trading over wheat it could be enticing producers to switch to feeding higher protein wheat at a lower cost.  The cheaper soft white winter wheat is not available in all areas and may not be an easy switch for all operations, but it would seem to be a savvy decision where available.

So the question is - is there enough unexpected domestic feed demand to sustain a 50 cent rally in both corn and wheat?  The upcoming Grain Stocks report will go along way to answering this question.  However, even if the stocks report shows greater demand then the USDA has currently accounted for we have to keep in mind that this was at lower prices.  How much price rationing has occurred after a 50 cent rally?  As we saw this last summer price rationing can happen very quickly at these price levels.

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Another thing happens at high price levels - competition.  A change that the USDA made on the March 7th report that has gone widely unnoticed or at least not talked about is the 25 million bushel increase in corn imports.  In fact the increase in imports offset the increase in feed demand for corn.  Now that prices are higher and the US dollar is stronger it makes importing corn from South America very attractive.  A 50 cent rally on top of a strong rally in the dollar is closer to a $1US rally down south.  If this occurs on a large scale it could more then offset any increase if feed demand.  So, if this 50 cent rally in the last two weeks has rationed any demand or triggered any South American corn imports this could be a short lived rally in old crop corn and wheat.  Even it this report shows a bigger draw down in corn and wheat stocks then expected the bullish reaction could be fleeting.  This seems like sure could be the case of "buy the rumor, sell the fact". 

Soybeans have been all over the map in the last two weeks.  We saw a sharp decline last week based on lower Chinese markets, concern about the Chinese economy, and thoughts that Brazil was getting their act together.  This week we have come back in a hurry on the idea that Brazil in fact has not gotten their act together and China said they are back to looking at US soybeans due to shipping delays.  The issue with this is that Brazil will get their act together and when it happens they sure do have a lot of soybeans to move.  Last week Brazil cut a tax benefit on domestic soy oil which means they will probably crush less and export more.  On top of that, China is selling up to 1.5 million metric tons of state reserves to settle down their domestic soybean prices.  This means that they might not need to buy many more soybeans between now and when the can start receiving shipments from Brazil.  At some point they will have to replenish their state held stocks, but they could very well wait for lower prices.

The bottom line is that this report could be bullish, but how much of this has already been factored into the market?  And, going forward how much price rationing has occurred for feed demand on this 50 cent rally in corn and wheat?  The big question is corn and soybean imports from South America.  They certainly have their logistical issues, but they also have a monster crop and they will eventually figure out how to get it shipped.  When they do I'm not so sure it matters how tight our old crop balance sheets were at one point because we could easily have all the soybeans and corn we could want delivered to our door for cheaper.  The strong US dollar certainly helps with that. 

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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 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

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