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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.

Buy the Rumor, Sell the Fact?

Mar 26, 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.   

Grains have spent the last few weeks rallying in front of Thursday's widely anticipated Quarterly Grain Stocks and Prospective Plantings reports.  Corn and wheat in particular have picked themselves off of lows on the idea that feed demand is cutting through stocks faster then expected.  As far as the plantings report is concerned, there may have been some acres moved back from corn to soybeans but overall there should be big acreage numbers after record high prices last summer.  But, is the USDA going to give us a super bullish stocks report that will send grains on another leg higher?

Feed demand does seem to be stronger then we had anticipated, and it very well could have caused a bigger then expected draw down in corn stocks and if the upcoming report reflects that it would probably get a bullish reaction.  However, you have to wonder how much of this has already been factored into the market during the last month as corn and wheat have both rallied over 50 cents off lows.  Keep in mind that this quarterly grain stocks report is retrospective, meaning that it is telling us what going on leading up to March 1.  A lot has changed in the last 27 days.

For one, the rally in corn and wheat may have been successful in price rationing some feed demand.  We can see signs of this already with last Friday's cattle on feed report showing the lowest placements since at least 1996 and maybe much longer.  As we saw last summer, price rationing can happen very quickly.  Global and domestic economies are more fragile and demand is more sensitive then in years past.

Another interesting idea that I have not heard much talk about is feed demand shifting more into wheat.  May corn and May wheat prices are almost identical.  Operations that have access to the cheaper varieties of wheat and can make the switch or add wheat to the feed mix should be taking advantage of this.  This will not completely offset corn demand for feed, but we could be overstating corn usage and understating wheat usage for feed.  Even if this report does not reflect this, it may be happening more and more as time goes on.

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

The biggest  factor going forward could be imports from South America.  In the last month the US dollar has gotten significantly stronger which not only makes South American grain more attractive to global end users but to the US as well.  We have heard reports of corn basis dropping at the gulf due to imports from Argentina.  If this is true it is especially surprising because they are not vary far along into harvest and this would have likely been old crop stocks.  If they are willing to sell us old crop stocks at these prices you can sure bet they would be very willing to sell new crop.  This is a situation that needs to be followed closely because it will likely dictate the price action in corn and wheat more then any other factor until we get into summer weather markets.  It has gone widely unnoticed, but the USDA offset the higher feed demand on the last balance sheet with an increase in imports.  If the USDA is looking to "scale in" imports into the balance sheet this could just be the tip of the iceberg and could end up making both corn and soybean balance sheets much more comfortable.

So, this report could certainly give us a bullish stocks number, but even if it does it may not be enough to send grains on another extended leg higher.  You have to wonder how much of this has been factored into the market already, and if higher prices has triggered price rationing and imports.  If the stocks report is bullish enough to rally the markets on thursday, I will be very weary of continued strength through next week.  The great news here is that the lead up to this report has given producers some better prices to sell.  Take advantage.

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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

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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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