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.
This is the burning question on everyone's mind. I get asked this question in almost every conversation I have. Clients, potential clients, news reporters and other analysts all want to know the answer. Really, there is no cut and dry answer because there are so many factors at play. Obviously grain fundamentals play a big part in determining price, but other things such as money flow and inflation/deflation play a part as well. So, I explain that I do not have a crystal ball (pardon the cliche) and I do my best to predict the future. In doing so I think there are a couple key ingredients that I have not heard much talk about and that I think will be big determining factors. And, it may come as a surprise to some, but I'm not as bearish as most.
First of all what we do know is what the USDA has to say about planted acreage, production, demand and ending stocks. We might not agree with their opinion, but we have to live with it. The fact of the matter is that the USDA is projecting very bearish numbers as of the July report and the market has responded to it. Some feel that demand is overstated which is an even more bearish thought and some think the production numbers may be overstated which could shrink ending stocks a bit. However you want to work it most analysts agree that we could be looking at big ending stocks.
What we do not know for sure right now is average yield. So far we have seen late planting due a cold and wet spring, a hot and dry spell and now some timely rains. The key word there is some timely rains as not everyone has gotten their fair share. However it does seem as that the weather pattern is getting back to cooler and wetter. I do believe that the yield numbers the USDA gave us in the July report will need to come down, but I am not sure they need to be reduced dramatically.
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What we really do not know is what will happen in outside markets and with global economies in the next year. China economic numbers have been disappointing as of late, and the US is a big question mark in my mind. The FED has put a lot of effort into creating inflation and while I do not agree with printing money to get out of a problem I do recognise that it has boosted futures markets as a whole. Now, as the FED looks to wind down their printing the US dollar could be in a position to gain strength. This could hurt US exports, encourage South American exports, and possibly even encourage US imports of South American grain. This could also cause many of the funds to look to get out or even aggressively short commodities markets. If on the other hand however the FED decides to start printing money again this could have a negative effect on the US dollar and give a big boost to futures, grains included. I am not a betting man, but if I was I would take the side of the FED continuing to print money but really no one knows except Ben B. and his buddies.
In many ways this sounds like an utterly bearish scenario, and to a point it is. In fact these are many of the reasons corn, wheat and (to a lesser extent) soybeans have been in a down trend for some time. Now, I have been called a "bearish idiot" many times since last September. Fair enough and I do appreciate the feedback. In my defence though, the markets have agreed with me. But at this point I am getting less bearish as we push toward harvest. This is for two key reasons.
First, after a few years of mostly good profits for producers there has been a good amount of reinvestment back into the operation in the form of storage. Many of the guys I talk to, the bigger operations in particular have had storage building projects in the last few years. Here is where that may come to use. On top of that many guys have or are in the process of clearing out their bins as prices have been good. There probably will not be (rather shouldn't be) many bushels of corn or soybeans stored on farm by harvest. This leave an opportunity to store lots of grain on a national scale. Producers will likely hold on tight to stocks waiting for higher prices. If this is done on a large enough scale it could cause a shortage in the cash market and push basis up and support futures prices. Now, there will be producer selling on bounces to free up cash but this could aid in keeping prices from going to ultra low levels that some suggest.
Second, crop insurance levels set last February are pretty good. This could encourage storage, the canceling out of low yielding fields, and an overall sense of not wanting to sell anything under insurance levels. This may sort of bail out futures prices to some extent this year. It is very important to note however that this may not be the case next year.
So, yes I have been guilty of being very bearish in for the last 9-10 months. Not that that has really been a bad thing for most of my clients. But at this point I might not be as bearish for 2012-2013 at the next guy. I do think there is certainly more downside potential from here, and if called me and wanted to sell something I would encourage you. But, my downside targets are not super low. I do think corn will get to $4.45 by harvest. I do think wheat will follow and get near $5.80. And, I think that once soybeans get past the weather market they could take a shot at $10.50. But that may be about it this year. Next year is the year that scares me the most at this point. Crop insurance levels could/should be at lower levels. Storage bins could be overflowing. Beginning stocks may be the largest in years. So what happens if we have a decent crop next year? Well, thats when we might be talking about ultra low prices. The good news is that there are still opportunities to get some decent prices for next year if you know where to look.
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Feel free to give me a call or shoot me an email if you would like to talk about your marketing plan, the markets, weather, or just to visit. 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 firstname.lastname@example.org
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.