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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.

Why did Corn and Soybeans Rally on a Bearish USDA Report?

Jul 11, 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 July USDA supply and demand report was bearish vs expectations for corn and soybeans, so why then did corn and soybeans rally into the close and end up higher on the day?  Well, there are a few other factors at play that had more of an influence then the slightly bearish report.  

Ending stocks for both corn and soybeans came in slightly higher then expected but within the range of trade guesses.  This had a negative effect on corn and soybeans at first, but after a few minutes markets had turned and were headed back up.  Some people will call this report a non-event or a snoozer but the gravity of the large supply numbers may weigh heavily on grain markets long term.  Short term however there are other factors that took center stage today.  

A big reason for the bounce off of lows seems to be fund buying in the grains.  The US$ has been under a lot of pressure in the last 24 hours stemming from comments made by Fed Chairman Ben Bernake.  Yesterday he hinted to a new Fed policy that would increase stimulus and this has put pressure on the US$.  The sharply lower US$ has incubated interest from inflationary fund in buying commodities and after the report had passed it seems they turned their attention to the grains as well.  The long term direction of the US$ now comes into question after being at 3 year highs just days ago.  If this is a change in trend to the downside for the US$ this could add more support to the grains and commodities markets as a whole.

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

Another factor that has a big influence on grains is weather.  Even though we have not seen the same scorching heat and complete lack of rain like we did last year in most areas, this year has not been without its problems as well.  It is easy to dismiss the large carryover numbers in corn and soybeans on the USDA report by saying that a lot can change between now and harvest, and it can.  There is certainly a potential that the weather pattern changes significantly and corn and soybeans miss out on much needed rains during key moisture sensitive stages of growth.  Some of the forecast models have just such a scenario playing out.  However, it is important to keep in mind that at 68% good to excellent in corn and 67% good to excellent in soybeans are significantly higher then where we were last year.  It is also important to keep in mind that even with one of the worst droughts in decades last year we were all surprised by how well crops actually did comparatively speaking.  

The calendar is also another factor.  This is generally the time of year when corn and soybeans are on their way to putting in summer highs.  As we approach the key moisture sensitive stages of pollination the market usually finds some weather to be concerned about and adds weather premium until the key moisture sensitive stages are behind us, or at least the 2 week forecast offers the outlook for good conditions.  Also, there is generally a lack of major sellers as producers would rather wait to see that they have a crop before adding to sales.  

This reversal higher on a bearish USDA report could be a bullish sign for the days to come.  And, there are certainly other factors at work that could continue to add support to grains markets.  Weather really is the key at this point.  A hot and dry spell during pollination in corn or pod set in soybeans could have a negative impact on yields.  However, with the USDA projecting some of the largest ending stocks in corn and soybeans that we have seen in recent years, crop conditions at 68% and 67% respectively and lagging demand it would seem unlikely that ending stock numbers would fall to levels that would necessitate price rationing. 

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If corn and soybeans make it through key moisture sensitive stages without huge problems covering the entire growing area it is a very good possibility that prices will need to go lower into harvest.  So, embrace the rally, but keep these huge USDA projections in the back of your mind.    

December Corn Daily chart:

November Soybeans Daily chart:

December 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 $5.50 and soybeans near $13.00. 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

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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