What is the Worst-Case Ukraine Scenario for the Grains?
Mar 04, 2014
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.
The last few days have been dominated by talk of unrest in the Ukraine and the potential global issues it may bring going forward. One of these issues could potentially be a disruption of Ukraine's grain export business. So far this has not been an issue, but we wanted to take a look at the worst-case scenario going forward.
First of all it is important to note that to this point there has been no disruption to Ukrainian grain export business. Two major global grain companies have said that they were experiencing business as usual in the Ukraine. Also, farmers seem to be preparing normally for the coming growing season. But, with the situation ongoing and political tempers heating up the question is what would happen if the Ukraine were no longer able to or interested in exporting corn and wheat.
The Ukraine is a big player in the global wheat and corn markets with the USDA currently estimating that the Ukraine will account for roughly 16.2% of global corn exports and 6.3% of wheat. For perspective, this would represent just under half of Australia's wheat exports and a little less then Brazil's corn exports. If the Ukraine were unable to continue to export grain this would effect the corn and wheat markets dramatically. But, how dramatically?
From a worst-case scenario point of view (which is what we are going for here) let us assume 2 things: 1) that the Ukraine has not exported any 2013/2014 corn or wheat to date, and 2) that any lost exports from the Ukraine would be picked up by the US. Now, neither of these things would be close to the reality but for lets just assume they were for now. If this were the case it would mean that the US would have to pick up the 10 mmt (million metric tons) of wheat and the 18.5 mmt of corn. This translates into 367.4 million bushels of wheat and 728.3 million bushels of corn. Using the current USDA carry over numbers this would leave the US with roughly 191 million bushels of wheat and 753 million bushels of corn. This would be a very tight balance sheet for wheat, but for corn it wouldn't be too far from the carry over from last year.
CME Options On Futures: The Basics: http://www.zaner.com/offers/?page=9&ap=tseifrie
Now again, neither of the two assumptions are true. It is not the case that the Ukraine has not exported any 2013/2014 grain, and it is also not the case that all of the lost exports would be picked up by the US. But, there are other factors that would need to be considered as well. If Ukrainian grain exports would shut down it would cause higher world prices which would likely curb some global demand. Also, if it were the case that the US and Russia were to get into it over the matter then some US exports to Russia and maybe other countries could suffer as well.
The better way of looking at it may be to subtract the Ukrainian export figure from the USDA's projected global ending stock figure. Basically this would mean that the lost exports from the Ukraine would get spread out a bit which could keep prices more normal and may not cut into global demand. If we looked at it this way we would have a 173.73 mmt carry over of wheat and a 138.8 mmt carry over of corn using the current USDA estimates. Compared to the last three years this would represent a slightly smaller world carry over in wheat then average and still a larger world carry over in corn. This may not be the best way of looking at it either because countries that are not normally exporters may not jump into the mix and logistics can be affected but the reality would fall somewhere between these two scenarios, most likely closer to the second.
Longer term issues could arise as well from an extended engagement. Potentially farmers could slow or stop plantings. Currency and governmental issues could make Ukrainian exports unavailable. Port damage could occur if there were a conflict. But, at this point it seems unlikely that this will escalate to a major conflict.
Overall the Ukrainian situation is bullish for the grains, and in its worse case scenario has the potential to send grain prices sharply higher. Certainly no one knows what the future will bring but for now Ukrainian exports have not been effected. The markets will continue to monitor this situation closely. In particular it seems that funds have been aggressive buyers of anything that could be effected by the Ukraine. If this situation passes without much consequence these funds could want to exit these positions. So, stay tuned.
Sign up for our newly renovated Morning Ag Hedge newsletter! If you have signed up previously there is no need to sign up again, you will see it in you inbox shortly. Sign up for our Morning Ag Comments: http://www.zaner.com/offers/?page=17
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.
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. 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 firstname.lastname@example.org
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.