The Ted Spread

Soybeans Continue to Probe for Lows?

TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS ANDMAY 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 day of the September WASDE report the November soybeans posted a surprising reversal higher even with a bearish report. However, soybeans have been trading lower ever since closing at a new contract low on Tuesday. With trade tensions continuing to escalate between the US and China it has been difficult to find any good news for soybeans. How much worse will it get?

Tag, You're It

To start the week the US announced an additional $200 billion on Chinese goods at a 10% tariff with a plan to increase tariffs after the first of the year. China responded with an additional $60 billion in tariffs on US goods and said they will also increase the percentage if/when the US does. While to some extent it is encouraging that China may be running out of goods to place tariffs on it is concerning that they may at some point increase the tariff percentage on some goods that are already under tariff. The obvious question/concern - could soybeans be on this list?

At the very least the continued escalation by both countries makes it seem that any sort of resolution is nowhere in sight. While there could certainly be talks happening behind the scenes that could be a much closer to a resolution, it is hard to imagine especially with how blatantly (brazenly?) transparent President Trump has been on his social media accounts. The hope is still that something is done before November, but the clock is ticking.

Great Timing (Not)

Apparently... getting into a trade war with the world's largest consumer of soybeans can have a rather negative effect on prices. To make matters worse however this current soybean crop seems to be getting bigger. On the September WASDE report the USDA increased soybean yield 1.2 bushels an acre to a new record 52.8 bushels an acre. This is a new record soybean crop by a fair margin.

Sign up for our Morning Ag Hedge newsletter! Sign up here: http://www.zaner.com/landing/ag_hedge_newsletter.asp

As of right now the USDA is only looking for a modest 70 million bushel decline in exports for this marketing year. This translates into a new record carry over of 845 million bushels, almost 270 million bushels higher than the previous record. For comparison, the last time we set a record national average soybean yield in the 2016/2017 marketing year our entire carry over was 302 million bushels. What if the decline in exports is more than the USDA is accounting for? There is a very real possibility of a 1 billion bushel carry over, nearly doubling the previous record.

That's a Lot of Crushing Soybeans

So what do we do with all of these soybeans? It seems to me that if things do not change quickly the market is going to have some jobs to do. For one, we need to stop planting 90(ish) million acres of soybeans. Low soybean prices will likely help that. Secondly, we need to create more domestic demand. This is a much more difficult task as domestic demand almost is completely comprised of the soybean crush. The problem here is that it takes a lot of time and money to do this, and of course willing investors.

We have complimentary 2018 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)

To make this happen the market will likely offer record soybean crush margins (low priced soybeans and relatively higher priced soy oil and meal), but this alone may not be enough. I have proposed that if The White House wants to help American Ag (and stick it to China) in the long run they should cut regulation that creates red tape for crush expansion and offer (tax?) incentives to offset lower profit margins that would likely come from adding more meal and oil supply to the market. So far this seems to have fallen on deaf ears. But I digress..

Don't Bring Me Down (Keep Reading)

With this crushingly negative market outlook right now does that mean that soybean prices will remain in a freefall? I wish I could say no, but honestly I have no idea how aggressively China will cut their demand and/or what the US will do to help the situation. What I will say is this - I hope that soybeans find some footing and stage a bounce for producers to sell better prices. If the market believes we are moving toward a resolution we could find a near term low and try to bounce. For the fact that the USDA did not lower exports further on the September WASDE report it suggests that they will wait and see if the export sales come or not.

There is also the idea of harvest lows. In years past producers have been quick to sell soybeans at harvest and store corn.  This year may be different as guys hope for a resolution of the trade war to bring higher prices down the road. Less beans being sold off the combine could mean less harvest pressure. Finally, South America is running out of soybeans and this could keep their prices high enough to make us very attractive to the rest of the world (hopefully including China). This could give soybeans a chance to bounce into the winter months.

Proceed with Caution

But do not mistake my short/mid-term optimism for long term bullishness. I am very concerned that if we do not have a resolution in place with China or an alternative strategy in place by the first few months of 2019 things could get very ugly. If we get into the New Year and our export sales have been lackluster and the South American crop is without major issues we could be in deeper trouble. Once that South American production starts to come online the market could go on a mission to eliminate as many soybean acres as possible.

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 

November Soybean 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 tseifried@zaner.com

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.