Since the beginning of the month some prominent weather sites particularly WX Risk have been seeing signals that a shift to a warmer and drier pattern could be in store for the majority of the major grain growing areas of the Midwest. There have been hints of this showing up on the weather models last week but the data over this past weekend through July 14th provides stronger evidence. The model shows it drier in all key areas as the trend is continuing as we move into 2nd half of July. For the next seven days forecasts call for good rains of 1-3" over North Dakota, Minnesota, and Wisconsin with 70% coverage and 0.50-1.50 inches over Michigan, eastern Indiana, Ohio, and eastern Kentucky. The rest of ECB is dry as are most of WCB and all of Delta and all of the Plains. In addition temperatures finally turn warmer east of Mississippi river.
Although it is a commonly held belief that El Nino Summers in the U.S. always bring above normal rainfall and very little with respect to sustained heat over the Midwest, it is not necessarily the case. El Nino Summers which featured significant or rapid development of the El Nino phenomenon in May and June sometimes develop a different type of weather pattern for the second half the summer.
We are beginning to see strong signs of this on the various weather models. The image below shows the Jet stream pattern for July 21st through the remainder of the month. The key point here is to realize that the Jet stream is finally shifting to the north along the US Canada border. This is one of reasons why south central Canada likely turns wet in this timeframe - as well as North Dakota and Minnesota But all areas to the south seems to turn significantly drier.
Note that weather and its impact on future yields is 90 percent of our pricing influence on grains. If the weather forecast continues to shift towards a warmer and drier outlook, the grain market could see a slowdown in buying support, and perhaps a correction. Therefore I propose a futures spread to take an advantage of a potential correction. For some bearish exposure in the soybean market one could short the November 2015 contract while buying the November 2016 contract initiating a futures spread. I would suggest selling at 56 cents; selling the November 15/November 16 soybean futures spread with a profit objective target at the 50 percent retracement level at 29.4. Protective stop losses should be placed at the highs above 73.2. If filled the risks are the commissions and fees along with the Good to Cancel stop loss at approximately at least 17.4 cents.
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RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.
Sean Lusk is a registered commodity broker and Co-Director of the Commercial Hedging Division of Walsh Trading in Chicago. Sean began in the business as a runner on the trading floor during summer breaks from college in 1993. Upon his graduation from Southern Illinois University at Carbondale in 1996, Sean began his career on the trading floor of the Chicago Mercantile Exchange (CME). Overseeing billions of dollars of transactions working as a clerk in the Eurodollar pit, Sean took the next step and became a floor broker and member of the CME in 2003. He handled customer orders for banks and investment houses from all over the world from inside the Libor pit at the CME.
Now, at Walsh Trading, Sean utilizes his experience in the marketplace and his professional client service skills to aid and assist customers in their trading endeavors.
Sean writes daily and weekly commentaries focusing on Precious Metals and Agricultural Markets along with related market activity. He has been quoted in various media outlets discussing futures markets. These include, Futures Magazine, Reuters, Forbes, Kitco, Nikkei Press and CCTV.com.