~~TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND MAY 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.
The February USDA WASDE report is rarely a game changing report. For the most part the supply side of the equation is known except for the marginal import category. Changes in the demand side of the equation are common and can start a trend of changes but it is early in the season and things can and do often change. Sometimes the most notable numbers are South American production estimates, which were looked at very closely on this report. With a bearish reaction to a bullish vs expectations report what should we expect going forward?
At face value this February USDA WASDE report was bullish vs expectations at least for the domestic numbers. The trade was expecting a slight reduction on soybean carry over at 398 m/bu and the USDA came out with 385, a 25 million bushel reduction. The trade was looking for a mostly unchanged corn balance sheet and the USDA came out with a carry over of 1.827 b/bu, a 50 million bushel reduction. This gave us an initial spike but prices quickly retreated.
The carry over reduction in soybeans came from a 15 million bushel increase in crush and a 20 million bushel increase in exports. This was partially offset bu an increase of 10 million bushels in imports. In corn the carry over reduction came from a 75 million bu increase in corn used to make ethanol but was partially offset by a 25 million bu decrease in corn used for feed. Shortly after the report traders were questioning the validity of such a sharp increase in corn used for ethanol production and the increase in soybean demand. This likely had something to do with the negative reaction to the seemingly supportive numbers.
A bigger reason for the weakness in grains may be more tied into the "big picture". For one, regardless of the smaller then expected ending stocks estimates for corn and soybeans we are still looking at some very big numbers and to a degree it is disappointing that low prices have not been able to encourage more demand. Also, strength in the US dollar and weakness in other commodities, particularly crude oil, may have kept the fund buyers at bay.
When we take a closer look at South American numbers we see small changes in Brazil and Argentina but the changes offset when you look at South America as a whole. Some were disappointed that the USDA did not lower the Brazilian soybean crop more and that the overall SA production remained unchanged. However, a lower world carry over in soybeans (below 90 million metric tons) may be slightly supportive going forward as it seems that we may have put the high in for the world carry over projections, at least until more is known about the upcoming US crop.
Going forward things get a little tricky. We have big crops and big carry over numbers, but projections have been steadily declining in the US and now the world. South American weather for the most part looks good for finishing out the crops but at some point we could get concerned about harvest delays. If harvest delays were to persist in South America it could mean more export business for the US and possibly smaller carry overs. The corn carry over is still very big at 1.827 billion bushels, but if we don not get enough corn planted this year we may need every bushel of that to take into next year. And, we wonder what the funds have in store based on the US$ and other outside markets.
Weather will be a big factor in weeks, months to come. South American weather has been followed closely and will continue to be as we watch to see how crops finish up and how harvest gets along. As I mentioned before, how quickly or slowly South America is able to get product to port will likely determine if the USDA is under or overshooting the mark on exports. Prolonged harvest delays could mean a longer window for US export opportunities and smaller balance sheets, while a fast pace to harvest could result in business shifting to South America faster or even cancellations of existing sales. Beyond that we will start to watch US weather closely to see if we can get the crop in on time. Planting delays in the US could mean even less corn acres and could set the stage for a tight corn balance sheet next year, while a fast planting pace could mean more corn acres and slightly less bean acres but more acres as a whole... This should keep things interesting for months to come.
* I will be out of the office for a little bit sometime soon as my wife and I are expecting our second child in the next few days. But I will be getting back to everyone as soon as I can. Thanks for the understanding.
We have some complimentary 2015 commodity reference calendars available. They are a little bigger than pocket sized and very useful if you follow markets. You can sign up for yours here - http://www.zaner.com/offers/calendar.asp
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. Also, follow me on twitter @thetedspread if you like.
March Corn Daily chart:
March Soybeans Daily chart:
March Wheat Daily chart:
All this means that speculators should be looking for opportunities and producers need to look to lock up some prices. 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 [email protected]
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.