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Is the Trade Looking for Too Much of a Yield Reduction?

Published on: 23:49PM Aug 08, 2017

TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS ANDMAY 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.

As we get ready for the USDA's August World Agricultural Supply and Demand Estimates (WASDE) report all eyes will be on corn and soybean yields.  Yields are a huge part of the production equation and the August report is likely going to set the tone for months to come.  With the average trade guesses looking for an almost 5 bushel an acre reduction in the national average corn yield is the trade looking for too much?

The trade guesses themselves can be a little tricky.  It seems that when the big 3 news outlets ask for estimates it is a little unclear if they are looking for what the USDA might say on this particular report or if they are looking for a final yield estimate.  We participate in the surveys and we provide our estimate for what we think the USDA will say on the report but some of the respondents might be submitting estimates for the final number.

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This makes a difference for two reasons:  For one, if weather gets better our yield estimate can still go back up.  Secondly, (and partly because of #1) the USDA tends to be conservative, at least in recent years, because they do not want to overshoot the mark.  So, in the case of this year, it could be the case that some of the estimates are lower then what the expectations are for this report.

A year that we have all been making comparisons to when it comes to crop conditions and yield expectations is 2011.  Now, it is important to note that there were a lot of very different factors in 2011 compared to 2017 and that the comparison should be limited to crop conditions and yield potential.  This year, similar to 2011, crop conditions started near 70% good to excellent and dropped to 60% or below with the biggest drop coming during the key moisture sensitive time of pollination.  This makes 2011 a likely analogue year to make comparisons to, and in 2011 the USDA aggressively dropped yield on both the August and September reports only to have to reverse themselves and move yield higher again by 4.6 bushels an acre for their final number.  For this reason the USDA has been more conservative recently and this could impact the August report.

So, with the average trade guess looking for a roughly 5 bushel an acre drop to 166 for a national average yield there is a possibility that the trade is expecting too much of a decline too quickly from the USDA.  Personally I think they should have enough compelling evidence in crop conditions to do so, but they may not.  But, even if they do not do it on the August report it might be more about the direction they are going.  I would say that even a modest drop in yield in the August report (even if it is less than expected) might be a good signal for what is to come of future reports.

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Give us a call if you would like more info on the strategies we are using or if you would like to set up an account to put a plan in action.  Ted Seifried - (312) 277-0113.  Also, 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.  Follow me on twitter @thetedspread if you like. 

 

December Corn Daily chart:

 

November Soybeans Daily chart:

December Wheat Daily chart:

 

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

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.