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.
There has certainly been no lack of news the last two days with the Monthly USDA report yesterday and the FED announcing Quantitative Easing round 3. Both the USDA and the FED had some interesting things to say. In particular the FED decision to move forward with QE3 at this time was a bit of a surprise to me as I firmly believe it causes more long term harm then good, and it did not seem it needed to be done right now with the US dollar off of its highs and equities markets doing well. The logic just is not there for me, but then I guess that logic may not be the driving force of the Federal Reserve Open Market Committee.
The September USDA report brought us some small surprises. The USDA made marginal reductions in corn and soybean yields moving even closer to the low ball private estimates we have seen. The surprise came with the sharp reductions in demand for both corn and soybeans. The USDA continues to make a statement that were are seeing strong demand destruction at high prices and suggesting that price rationing may be easier then the market had originally thought. Soybeans were strong because the yield did come in lower while much of the trade was thinking that the USDA could raise the yield due to improved crop conditions. The soybeans had sold off 96 cents from the highs expecting a bearish report and as it turned out the report was not as bearish as feared so we took about half of that back. Ultimately I have to look at this report as being bearish, especially for corn, because lower yields did not translate to lower ending stocks.
The corn has to be of particular concern because with a 733 million bushel carryover the situation does not seem as dire as was once thought. Yes, this is a tight balance sheet, but no where near the numbers that were being thrown around in the midst of the scorching summer heat. In fact, back in March - May we were talking about a similarly tight balance sheet for old crop corn and trading mid $6. The time of year could mean added pressure as spreads are not offering much incentive to store grain this year.
CME Options On Futures: The Basics: http://www.zaner.com/offers/?page=9&ap=tseifrie
Soybeans also have a tight balance sheet, but not record tight. Yet, we have traded record high prices. The key here is going to be the South America crop. If they fair better then last year on what is predicted to be record acreage then we could be swimming in $14.00 SA soybeans by March.
With record high prices and tight but not record tight balance sheets it seems that there would need to be some outside factor contributing to high prices - Like in 2008 when funds were buying anything tangible because of strong inflation and a weak dollar. Enter QE3... Further easing to the tune of $40 billion a month certainly puts downward pressure on the US Dollar and creates inflationary pressures. However, the US and global economies is certainly not booming like 5 years ago. So QE3 could have a diminished effect, care of the law of diminishing returns.
As I stated earlier, I do not see the merit in doing QE3 at this time. Partially because I don't think it was needed at this time, but also because the intended results of QE have not been realized in rounds 1 and 2. QE was intended to do 2 things: create jobs buy adding money to the money supply for banks to lend so companies could invest in capital goods or labor, and restore confidence in the US stock market. QE has helped put pressure on the US dollar and therefore prodded the US stock markets higher mostly because people need to put money somewhere to keep up with inflation and a weak dollar. But the main goal of creating jobs has never been realized anywhere near the intended amount. So this round of QE may turn out to have very little effect on the economy or the markets.
When Does Weather Matter: http://www.zaner.com/offers/?page=6&ap=tseifrie
It will take time to know if QE3 is successful or not, but for today the effect on grains was minimal with corn closing up 4 1/4 and beans up 1 1/2. Harvest pressures and a more comfortable balance sheet may take center stage going forward.
With high volatility in a market, option strategies may be a good tool for hedgers and specs alike.
December Corn Daily chart:
November Soybeans 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 new crop corn above $8.00 and new crop soybeans above $17.00. 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.
Ted Seifried (312) 277-0113 or [email protected]
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?rid=Seifried
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