Happy Thanksgiving week market watchers. Well, the snow has finally melted from what was an unusual dusting-plus some for mid-November. Luckily the weather turned much nicer after Monday for our visiting shooters and guests for the 52nd Grand National Quail Hunt in Enid.
Seems like this recent cold snap has us all wondering if such weather foreshadows a cold, wet winter ahead. Only time will tell. After a chilly weekend with freezing temps for lows, we look set for a relatively clear and mild week ahead with lows above freezing and highs in the upper-50s to low-60s. Sounds like a good opportunity to get at least the outside portion of the Christmas decorations in place before another cold snap. The week ahead will be a shortened trading week in markets with trading halted Thursday for Thanksgiving to resume Friday morning, but only until around noon for most contracts. Friday also is expiration day for December options in grains, including corn and wheat, so I will be handling the food coma while watching the charts.
Here’s how it works. If you have “in-the-money” options, i.e., your option strike price for long puts is above where the futures close or below for long calls at the time of expiration, then your option will exercise into a futures contract at the level of your option strike price. Your position will then be short the futures for long puts and long the futures for long calls. You will be holding these futures contracts until you offset them or if you prefer to hold, you have until first notice day of that particular futures contract and then can roll to the next futures contract month. Note that you are required to hold the respective margin for the futures contract after the option exercises. Short “in-the-money” puts and calls also will exercise, but in the opposite direction of the Longs. If your options are “out-of-the-money”, then they will expire and there is nothing to do except consider repositioning in the next contract month as your protection (up or down) is no longer in affect. If this sounds like a bunch of gibberish, it may help to further clarify why it is important to work with an experienced marketing and risk management adviser with knowledge of the physical market as well as futures exchanges, which are absolutely inseparable when it comes to your overall exposure to price and ultimately your bottom-line.
I’m well aware that the lingo in trading futures and options is daunting for farmers and ranchers who are not doing this every day and that many have heard stories of speculators, be they investors or farmers, getting burned in the markets, but there is always more to the story. Futures exchanges were first established for the sole purpose of helping farmers transfer price risk for a premium, a lot like insurance. That still is the case today, and thankfully we have significant interest from all kinds of speculators in addition to farmers and end users that are willing to buy that risk every single day from farmers, ranchers and end users making the premiums manageable/reasonable. If you’d like to know more how these tools can be incorporated in your marketing, risk management and plan for financing your operation, please get in touch with us. I will start from the basics, and we will work our way to strategies at your pace. It’s never too late to start and never too early to get started. Price volatility and drastic sell-offs like we’ve seen in soybeans, corn, wheat, cotton and cattle in recent months will only continue, so this situation is not going away nor will your bank’s interest in an operation plan with risk management as a key pillar fade.
To the markets. It has been a tough past couple months in commodity markets, particularly wheat, corn, beans and cotton that have been trading sideways since around the third week of September with soybeans largely range-bound since early July. Large and growing crops amidst the continued overhang of the U.S.-China dispute and a strong U.S. dollar, which made a 17-month high on Monday, have all contributed to lackluster support across the commodity complex. With China sending a letter to President Trump on Monday outlining a framework to discuss trade before the upcoming G20 meeting in Argentina at the end of the month, markets generally and beans particularly found some needed support to carry out the week. The newly elected Democratic majority in the U.S. House raises questions as to how much pressure will be applied on Trump’s current approach to trade, amongst other issues, with China, but also approval of the recently negotiated USMCA agreement replacing NAFTA. It will be interesting to see how equity and commodity markets alike process these politics leading into the new year. We likely will see more rhetoric on the China dialogue as we approach with G20 meeting as both sides position ahead of that meeting. With expectations that something positive make take shape, beans have remained firmer recently despite bearish fundamentals with a huge crop and stock levels.
As per USDA’s Monday report, the U.S. soybean harvest is 88 percent complete, 5 percent behind last year at this time and the 10-year average. If you are selling physical beans at this level, which we think is not a bad idea considering the above, I would suggest to look at regaining upside exposure with options. This allows you more time to wait for a potential deal after which the market should experience a pop, but without having to hold the entire value of a bushel of beans in case that doesn’t happen until the summer or doesn’t happen at all.
The corn and wheat markets have had a difficult time breaking out of the recent trading ranges with December wheat nearly reaching lows this week not seen since Dec. 12, 2017. Despite sufficient stock levels, we still believe that the wheat market is due for support despite seasonal trades selling wheat vs. corn and others. Such reasoning includes growing concerns over Argentine wheat quality after recent rains (Argentina is now the cheapest exporter with U.S. SRW in second place), declines in Australian output, reduction in U.S. planted wheat acres considering late maturity of summer crops and rains preventing planting and cold limiting growth ahead of dormancy as well as the looming potential of Russia to slow exports early next year given 2018 output down by 15 million metric tonnes and YTD exports 20 percent above last year. We would have liked to have seen wheat close higher than 3 cents on Friday, with December just shy of $4.83, but were encouraged by the move to positive after a bloody week. This market is looking oversold and we would advise getting positioned on the long side. The U.S. wheat planting report will be released on Jan. 11, 2019, with weekly condition rating reports starting now.
With final U.S. corn yields expected to decline further and corn prices trading near the bottom end of the recent range, corn also looks decent on the upside at these levels.
The cattle market finally found footing Tuesday after a sell-off that has plagued much of October and early November. With the November feeder cattle contract expiring Thursday, we now will trade January as the front month. Note that both the futures contracts and options on futures contracts are cash settled in the cattle market, meaning that “in-the-money” options do not exercise into futures as in grains. Both tools have the same expiration date and your gain or loss is simply reflected in your account. While we’ve been expecting a bounce from these lower trading levels, we remain cautious that such rallies will be sustained and break-out to the upside. On further strength in this market, we would advise producers with exposure to add downside protection while leaving the upside open.
Happy birthday is in order for our great state, which turned 111 years old on Friday. And finally, be sure to tune in to KGWA 960 every Friday morning from 6:30-7 a.m. to catch our Weekly CommodityBuzz on the airwaves with Alan Clepper where we discuss latest trends influencing our industry, marketing strategy ideas and commentary. Wishing everyone a successful trading week ahead.
Sidwell is a Series 3 licensed commodity futures broker and principal of Sidwell Strategies. He can be reached at (580) 232-2272 or at firstname.lastname@example.org. Futures and Options trading involves the risk of loss and may not be suitable for all investors. Review full disclaimer at http://www.sidwellstrategies.com/disclaimer.