Ted is the Chief Market Strategist and Vice President in charge of the Zaner Ag Hedge Group and specializes in agricultural hedging employing various strategies using futures, futures spreads, outright options and option combinations. He believes it is paramount to be able to use different strategies to adapt to market conditions. Ted works with large to mid size grain and livestock producers and end users in North, Central and South America.
What’s Next for the Corn Market?
Nov 12, 2015
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.
On Tuesday the USDA delivered a bearish blow to the corn market in the form of the November WASDE (World Agricultural Supply and Demand) report. Almost every change the USDA made to the balance sheet was not only bearish, but even more bearish than the trade had expected. Corn yield came in above expectations, the drop in export demand was bigger than expected, the drop in corn used for ethanol was bigger than expected, and both the US and global carry over numbers were much higher than expected. Now that this report is out of the way what is next for the corn market?
As a whole the trade was expecting a bearish November WASDE report for corn. The average trade guesses were looking for increased production, lower demand and bigger ending stocks for corn. The USDA confirmed that and then some with US ending stocks coming in over 150 million bushels higher than expectations and well above the high end of the range of guesses. This larger than expected increase came from a big increase in corn production and big decreases in corn demand.
Maybe the most shocking number was global corn stocks coming in over 23 million metric tons higher than expected. The majority of the increase came from a revision higher in China’s corn stock from last year. The USDA revised China’s beginning stocks by almost 19 million metric tons. Not only did the raise beginning stocks, but the cut demand as well resulting in an almost 24 million metric ton increase in China’s overall corn stocks. This goes a long way to explain why China has not been buying US corn and to why they were so desperate to cancel US corn cargoes last year, even going as far as to pull a technicality on a non-approved GMO.
This truly was the bearish report most had hoped to avoid.
However, in the aftermath of Tuesday’s USDA bombshell corn is only down about 5 cents from Monday’s close. Now, to be fair corn was already in the middle of a slide when the report hit, but so far the downside follow through has been minimal. As of Thursday’s close corn was holding 6 cents off of the report day lows. While current corn prices are not a reason for producers to celebrate could this mean that the worst of the news is behind us for now?
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Going forward I feel it is unlikely that the USDA will continue to increase this year’s corn production. If anything I would think that a revision lower could be possible early next year. The USDA national ave4rage yield estimate of 169.3 bushels an acre is the second highest yield ever only slightly behind last year. While we certainly did have some very good corn this year (especially in the west) there were also some big potholes in fields where acres were flooded earlier in the growing season. This was very apparent from the air and covered a large area from Missouri to Ohio. So, it may be the case that the USDA either has to reduce yield or harvested acreage to reflect this somewhere down the line.
Getting into the holiday season and end of the year there may also be some reasons to be less bearish corn. Cash sales may slow down dramatically and at some point basis may help support prices if end users get hungry for feedstock. South American weather could become an issue at some point with a strong El Nino collapsing into La Nina. An argument (maybe a strong one) could be made that corn needs to “buy” some acres for next year and that price relationship to soybeans may not be enough to get the acres needed. There could also be unforeseen issues that are not even on the radar right now.
The point is, that while the USDA shocked the corn market with a bearish bombshell of a November WASDE report I wonder where the next bad news will come from or if there will be such thing. It is certainly possible that something like a resurgence in bird flu shatters domestic corn demand so there is still some downside risk. Also, funds could choose to build a big short position in corn and push prices lower. However, funds may not be willing to be aggressive given the time of year, conditions in outside markets or the fact that corn prices are already low. The US$ could go higher yet, but corn exports are already slow.
It will be interesting to see how the next few months play out. In the end maybe nothing happens and corn prices move mostly sideways. But, I wonder what is next for the corn market and if the worst of the news is now behind us. Given current prices and the (so far) lack of follow through on this very bearish USDA report maybe there is less downside risk here than upside potential.
Please 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.
Dec Corn Daily chart:
Nov Soybeans Daily chart:
Dec 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 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.
11/12/2015 08:33 PM
Unforeseen Issue: www.afairmarketprice.com