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.
After months of hype the US and China are set to move forward the phase one trade deal. Many of the news outlets are calling this more of a trade truce than a trade deal, but for US agriculture this is really the part of the deal that really matters. In order to for Trump to consider rolling back the China tariffs and refrain from adding new ones China has agreed to buy an immense amount of US ag products. So, will the soybean market rejoice or ignore the deal?
The soybean market seems reluctant to embrace the trade deal for a few reasons. For one, we have been led to believe that we have had a trade deal before only to find out last minute that it fell apart. Secondly, traders have done well selling any good trade news. Traders are traders, when they find something that works the do it until it stops working. But those of us that follow soybean fundamentals closely have some deeper concerns.
Sign up for our Morning Ag Hedge newsletter! Sign up here:http://www.zaner.com/landing/ag_hedge_newsletter.asp
The sheer amounts that have been thrown around with this deal are staggering and relatively unbelievable. The sum of $50 billion of US agricultural products has been thrown around for months now. The reported details have the figure closer to $40 billion with a promise to "try" for another $5 billion. Either way these numbers seem astronomical compared to the previous agricultural trade with China. The previous highs were set in 2012-2014 and fell short of $30 billion of US ag and, this happened when agricultural products (specifically corn, soybeans and pork) were trading at much higher prices. This means that the sheer volume of US ag products would have to be much, much bigger than previous records.
This is concerning because China's feed demand has taken a big hit from African Swine Fever (ASF) ravaging China's hog herd. Some private estimates have gone as far as saying that half of China's hogs have been affected. Because of this China's soybean demand has backtracked significantly in the last few years. So does China even need the extra soybeans?
We also know that China can not destroy their domestic producers or their other trade partners they worked so hard to facilitate during the spat with the US. This means that products like corn and wheat can not be dumped on the domestic market without significant damage to Chinese producers and China can't cut South America and the Black Seal completely out of the equation. Even if they did the rest of the world would continue to grow and excess supplies would crash the global soybean market, literally no one would buy from higher priced US.
So, the trade is skeptical. And to add to it we will likely never see the details on exact amounts agreed upon in the deal. This could mean that soybeans don't immediately rally on the news of better trade relations and seemingly impossible purchases to come.
But I think the trade is missing the point. If China must buy to keep the deal they will buy if they want to keep the deal. And believe they do. To take it a step further I think they can and will do it without a dramatic impact to their domestic market or their trade relationships. It might be very much in their best interest to build a strategic soybean reserve if, say, things blow up again and that could be soon. While this part of the deal seems to be progress the situation still seems to be fragile.
For weeks the trade will likely remain skeptical that China will hold up to the deal. It may take actually seeing the sales made (AND SHIPPED) to get the market excited. But, do not ignore that if they do they may have to buy all the soybeans.;
We have complimentary 2020 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(Shipping to the US only)
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.Find me on twitter - @thetedspread
March Soybeans 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 [email protected]
Additional charts, studies, and more of my commentary can be found at:http://markethead.com/2.0/free_trial.asp?ap=tseifrie
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.v