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Daniels Trading | Hightower Report - The Bearish Outlook for Corn and Soybeans - December 2013

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Daniels Trading | Hightower Report - The Bearish Outlook for Corn and Soybeans - December 2013 …

Daniels Trading | Hightower Report - The Bearish Outlook for Corn and Soybeans - December 2013

To Hedge or Not to Hedge is NOT the question.
Furthermore, questioning whether to start hedging now or starting hedging later is not the answer. The answer is to hedge NOW with some safety values to protect against an unlikely change in conditions.
Corn is obviously already factoring its negative forward fundamentals. Therefore, hedgers might
need the exactitude of short corn futures hedges.
However if you are hesitant about the timing or level of hedging at current prices, use long call coverage or bull call spreads to benefit from a shift in market direction.
Soybeans appear to have greater downside and upside potential than corn. Therefore, we suggest
using puts as a hedge to start 2014 rather than futures. With many producers storing significant
amounts of corn on farms and the potential buildup of stocks for both corn and soybeans, producers might not only face significant declines in profit margins, there might also be significant pressure on rents and even farm land values if the bears’ worst case scenario unfolds.

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  • 1. INDEPENDENT. OBJECTIVE. RELIABLE. The Bearish Outlook for Corn and Soybeans Builds
  • 2. December 17, 2013 The Bearish Outlook for Corn and Soybeans Builds Monthly Nearby Corn 850 775 700 625 550 Cents / bu To Hedge or Not to Hedge is NOT the question. Furthermore, questioning whether to start hedging now or starting hedging later is not the answer. The answer is to hedge NOW with some safety values to protect against an unlikely change in conditions. Corn is obviously already factoring its negative forward fundamentals. Therefore, hedgers might need the exactitude of short corn futures hedges. However if you are hesitant about the timing or level of hedging at current prices, use long call coverage or bull call spreads to benefit from a shift in market direction. 475 Hedge Here 400 Not Here 325 250 175 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 100 1996 Soybeans appear to have greater downside and upside potential than corn. Therefore, we suggest using puts as a hedge to start 2014 rather than futures. With many producers storing significant amounts of corn on farms and the potential buildup of stocks for both corn and soybeans, producers might not only face significant declines in profit margins, there might also be significant pressure on rents and even farm land values if the bears’ worst case scenario unfolds. This Special Report was prepared by The information in this report may be considered dated upon its release and should not be considered interpersonal advice. This report is merely an opinion on the market and is a reflection of conditions as of its publication. Market conditions change! Traders should not consider entering positions without their own independent analysis of the market’s current situation, nor without further consideration of any changes to the information contained herein that may have occurred since this report was written. The authors are not responsible for any verbal or written claims and opinions that might be provided in conjunction with this report. The trading suggestions contained herein have been provided merely as a general guide and only for the purpose of quantifying the authors’ opinions. This report includes information from sources believed to be reliable but no independent verification has been made and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition. Any reproduction or retransmission of this report without the express written consent of Daniels Trading is strictly prohibited. 141 West Jackson • Suite 4002 • Chicago, Illinois • 60604 • 800-662-9346 • 312-786-4450 • info@HightowerReport.com • @HightowerReport Trading futures contracts and commodity options involves substantial risk of loss, and thus is not appropriate for all investors. Investors should carefully consider the inherent risks of such an investment in light of their financial condition. Page 1
  • 3. The Bearish Outlook for Corn and Soybeans Builds CORN HEDGERS NEED TO POSITION NOW IN ORDER TO BE IN A POSITION TO REALIZE A WINDFALL, INSTEAD OF WAITING UNTIL SPRING! With the December USDA Supply/Demand report in the rearview mirror, a review of the corn and soybean outlooks going into the first quarter of 2014 may be in order. Weakness in the Chinese stock market in the first half of December, a trade dispute with China disguised as a GMO issue, and excellent weather in South America are all factors that helped turn the grain markets lower in the days following the USDA report. New highs for the move on the report day for corn and soybeans followed by lower closes were bearish technical developments, and the lower closes for the week after posting new highs for the move were also seen as bearish. Traders will monitor the bird flu situation in China closely, as the new strain H7N9 (with 139 infected and 45 dead in China) has mutated to being resistant to a key first-line treatment without limiting its ability to spread. Traders might keep developments with the Bird Flu in China on their radar, with reports that samples taken from two live poultry markets in Shenzhen, China tested positive for the strain last week. This is unlikely to be a major issue, but it could have an impact if it mutates into a type that spreads more easily from human to human. Reduced bird feed usage (of both corn and soymeal) is the initial threat to the grain price structure. This issue has failed to go away, and with speculators leaning bullish, it could give way to active liquidation. The Commitments of Traders reports as of December 10th for soybeans showed trend following funds (noncommercials net of index funds) held a net long of 130,672 contracts, up 16,005 for the week. This is the largest net long of the year so far. Normal weather next year and a limited decline in acreage should leave the trade talking about a 2.5-3.0 billion-bushel carryout for 2014/15. If we were to assume that 92 million acres are planted and yield reaches 165.0 bushels per acre, ending stocks would come in near 2.618 billion bushels and the stocks/usage ratio at 19.9% (see table). This would be a 22-year high. The December USDA report news was slightly supportive against trade expectations, but the trade’s focus quickly shifted towards weakness in wheat, uncertainty over Chinese demand due to GMO issues for corn and DDG's, and expectations for a jump in production for the January USDA update. China has now rejected 4 cargoes of US corn due to GMO (about 250,000 tonnes). More cargoes are being tested, and more cargoes will reach China this week that could also be subject to tests. The USDA has already made aggressive upward revisions in its demand estimates. Note that total usage is up 375 million bushels from the September report; ethanol usage is up 50 million bushels; feed and residual usage is up 100 million bushels; and exports are up 225 million bushels. The ending stocks figure was 79 million bushels below the average trade estimate. But if the USDA were to increase the US national yield to 162.4 bushels per acre in the January report and leave everything else unchanged, it would push ending stocks back up to 1.960 billion bushels and push the stock/usage ratio to 15.0%, versus 7.4% last year. This would be an 8-year high for both stocks and the stocks/usage ratio. While US exports have been decent so far, the world market will see fresh supplies from Argentina and Brazil late in the first quarter of 2014 that will bring competition to the US exports market. Overall, world corn remains a buyer’s market. A record Canadian corn crop was forecast by the USDA, which helped to take US imports higher China Corn - Production vs. Yield 230 210 6.0 Producton (MMT) 190 5.5 170 5.0 150 4.5 130 4.0 110 Yield (MT / Hectare) CORN: The USDA raised its corn demand outlook by 100 million bushels in the December Supply/Demand Report, but the market faces expectations for a 140-310 million-bushel increase in the production estimate for the January report. We have even seen some estimates that US production will be adjusted higher by as many as 400 million bushels. March Corn managed to bounce 22 1/4 cents off of the December 2nd lows into the report, and this may have been enough to stimulate producer selling to keep the pipeline full. Barring any problems in the South American weather, the 2013/14 US ending stocks estimate may have put in its low and could be revised upward in 2014. The market is very quickly giving back all of its gains off the report. 6.5 2013/14 Estimate: 217.5MMT Issued Last Week 3.5 90 3.0 70 2.5 50 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 The Hightower Report Most Recent: As Of 12/10/2013 Crop Year Beginning Production Yield WHEN INVESTING IN THE PURCHASING OF OPTIONS, YOU MAY LOSE ALL OF THE MONEY YOU INVESTED. WHEN SELLING OPTIONS, YOU MAY LOSE MORE THAN THE FUNDS YOU INVESTED. STRATEGIES USING COMBINATIONS OF POSITIONS, SUCH AS SPREAD AND STRADDLE POSITIONS MAY BE AS RISKY AS TAKING A SIMPLE LONG OR SHORT POSITION. YOU SHOULD BE AWARE THAT IN THE EVENT YOU LIQUIDATED THE LONG SIDE OF A BULL CALL SPREAD AND STILL MAINTAINED THE SHORT OPTION POSITION, THEN YOUR RISK WOULD BE UNLIMITED. 141 West Jackson • Suite 4002 • Chicago, Illinois • 60604 • 800-662-9346 • 312-786-4450 • info@HightowerReport.com • @HightowerReport Trading futures contracts and commodity options involves substantial risk of loss, and thus is not appropriate for all investors. Investors should carefully consider the inherent risks of such an investment in light of their financial condition. Page 2
  • 4. The Bearish Outlook for Corn and Soybeans Builds USDA SUPPLY/DEMAND US CORN Dec Dec Dec Hightower USDA Planted Area (M Acres) Harvested Area (Acres) Yield (Bu/Acre) Beginning Stocks (M Bu) USDA USDA 2014-15 07-08 08-09 09-10 10-11 11-12 12-13 13-14 Estimate 93.5 86.0 86.4 88.2 91.9 97.2 95.3 92.0 86.5 78.6 79.5 81.4 84.0 87.4 87.2 84.6 150.7 153.9 164.7 152.8 147.2 123.4 160.4 165.0 1,304 1,624 1,673 1,708 1,128 989 824 1,792 13,038 12,092 13,092 12,447 12,360 10,780 13,989 13,966 20 14 8 28 29 125 25 10 Supply, Total 14,362 13,729 14,774 14,182 13,517 11,932 14,842 15,768 Feed & Residual 5,858 5,182 5,125 4,795 4,557 4,333 5,200 5,400 Food, Seed & Industry Production Imports 4,442 5,025 5,961 6,426 6,428 6,044 6,400 6,250 Ethanol for Fuel 3,049 3,709 4,591 5,019 5,000 4,648 4,950 4,850 Domestic Total 10,300 10,207 11,086 11,221 10,985 10,377 11,600 11,650 Total Exports 2,437 1,849 1,980 1,834 1,543 731 1,450 1,500 Use, Total 12,737 12,056 13,066 13,055 12,528 11,108 13,050 13,150 Ending Stocks 1,624 1,673 1,708 1,128 989 824 1,792 2,618 12.8% 13.9% 13.1% 8.6% 7.9% 7.4% 13.7% 19.9% Stocks/Use Ratio by 5 million bushels. More importantly, the Canadian adjustment higher due to a record yield may be a signal that the US yield forecast will also be adjusted higher in the final USDA projection in January. World ending stocks were pegged at 162.46 million tonnes, down from 164.33 million in November and below trade expectations at 163.3 million tonnes. This is still a 13-year high for world stock levels and compares with just 128.1 million tonnes for the 2010/11 season. The USDA left Chinese numbers unchanged, but there are plenty who believe that their production could be adjusted higher by 6.7 million tonnes and their demand adjusted lower. This would push world stocks over 169 million tonnes. The arguments against selling are many: 1) Funds are still holding a hefty net short position and may move to the sidelines into the end of this year; 2) index fund rebalancing into 2014 suggests that funds need to buy nearly 85,000 contracts; and 3) producers have a tendency to hold grain until the new year if they have not sold yet. But the upside for corn prices appears quite limited over the nearterm unless South America weather turns sour. Corn Hedgers Update: 1) New crop futures can be sold, or hedgers might look to establish forward pricing on any move to the $4.60-$4.70 level basis December 2014 futures. It may be the Feb-April time frame before hedgers might look at buying calls against this position. We intend to eventually end up with a short futures-long 2 call position, entering the call position with a delta near 0.25 per call. 2) Given the bearish outlook, hedgers might also consider buying the December $4.60 put near 40 cents and also selling the December $5.00 call near 22 cents. For starters, this would leave a $4.42 to $4.82 hedge window in place. 3) For any leftover old-crop corn, consider selling July Corn futures and holding 1 or 2 July $5.00 calls. WHEN INVESTING IN THE PURCHASING OF OPTIONS, YOU MAY LOSE ALL OF THE MONEY YOU INVESTED. WHEN SELLING OPTIONS, YOU MAY LOSE MORE THAN THE FUNDS YOU INVESTED. STRATEGIES USING COMBINATIONS OF POSITIONS, SUCH AS SPREAD AND STRADDLE POSITIONS MAY BE AS RISKY AS TAKING A SIMPLE LONG OR SHORT POSITION. YOU SHOULD BE AWARE THAT IN THE EVENT YOU LIQUIDATED THE LONG SIDE OF A BULL CALL SPREAD AND STILL MAINTAINED THE SHORT OPTION POSITION, THEN YOUR RISK WOULD BE UNLIMITED. 141 West Jackson • Suite 4002 • Chicago, Illinois • 60604 • 800-662-9346 • 312-786-4450 • info@HightowerReport.com • @HightowerReport Trading futures contracts and commodity options involves substantial risk of loss, and thus is not appropriate for all investors. Investors should carefully consider the inherent risks of such an investment in light of their financial condition. Page 3
  • 5. The Bearish Outlook for Corn and Soybeans Builds Demand numbers may have peaked, and supply numbers look to increase significantly in the January USDA Supply/Demand update. The technical action could be seen as a negative as well, as the market made a move to a new high and the closed lower on the day of the December USDA report and followed that with a lower close for the week. The USDA report news was considered neutral against trade expectations, but weakness in wheat, a shift in focus to South American crop weather and long liquidation from speculators seemed to take over as main forces on the day of the report. On top of soybean supply issues, if China begins to reject DDG's due to GMO issues, there will be increased protein supply on the US domestic market that could pressure meal prices. Traders see solid upfront demand for crush and export, good international crush margins and tight producer holding as shortterm positive forces. Weather in South America and the outlook on China Soybean - Domestic Usage 90 80 Most "Needs" thru Feb 2014 are Booked! Million Metric Tonnes (MMT) SOYBEANS: There has been no change in the strong upfront demand tone for the soybean market, and bull spreads may continue to advance in soybeans and meal in the weeks ahead. Still, in the December Supply/Demand report, the USDA seemed too low in its production outlook for 2014 for South America. In addition, the trade will have a tendency to view the outlook for increasing US production in 2014 as a possible bearish force. The aggressive speculative net long position, more talk that 1-2 million tonnes of soybean sales to China may eventually be cancelled, ideas that South American production could easily come in well above current forecast by 4-6 million tonnes, and the USDA estimates posted in the monthly report on Tuesday are all factors that could pressure the market over the near-term. With this setup, it will not take much in the way of negative demand news to turn the trend down. 70 60 50 40 30 20 10 0 87 89 91 93 95 97 99 01 03 05 Crop Year Beginning Most Recent: 79.5 As Of 12/10/2013 07 09 11 13 The Hightower Report USDA SUPPLY/DEMAND US SOYBEANS Dec 08-09 09-10 10-11 Dec Hightower USDA 07-08 Dec USDA USDA 2014-15 11-12 12-13 13-14 Estimate Planted Area (M Acres) 64.7 75.7 77.5 77.4 75.0 77.2 76.5 81.5 Harvested Area (Acres) 64.1 74.7 76.4 76.6 73.8 76.2 75.7 80.6 Yield (Bu/Acre) 41.7 39.7 44.0 43.5 41.9 39.8 43.0 44.0 Beginning Stocks (M Bu) 574 205 138 151 215 169 141 150 2,677 2,967 3,359 3,329 3,094 3,034 3,258 3,546 10 13 15 14 16 36 25 6 3,261 3,185 3,512 3,494 3,325 3,239 3,423 3,702 Crushings 1,803 1,662 1,752 1,648 1,703 1,689 1,690 1,700 Exports 1,159 1,279 1,499 1,501 1,365 1,320 1,475 1,400 89 90 90 87 90 89 87 89 5 16 20 43 -2 1 22 30 3,056 3,047 3,361 3,279 3,155 3,098 3,274 3,219 205 138 151 215 169 141 150 483 6.7% 4.5% 4.5% 6.6% 5.4% 4.6% 4.6% 15.0% Production Imports Supply,Total Seed Residual Use, Total Ending Stocks Stocks/Use Ratio 141 West Jackson • Suite 4002 • Chicago, Illinois • 60604 • 800-662-9346 • 312-786-4450 • info@HightowerReport.com • @HightowerReport Trading futures contracts and commodity options involves substantial risk of loss, and thus is not appropriate for all investors. Investors should carefully consider the inherent risks of such an investment in light of their financial condition. Page 4
  • 6. The Bearish Outlook for Corn and Soybeans Builds the part of many traders for adjustments higher out of Brazil and Argentina are seen as potential negative forces ahead. US ending stocks were pegged at 150 million bushels in the Supply/ Demand report, down from the November estimate of 170 million and below the average trade estimate of 153 million. Export demand was revised higher by 25 million bushels, and crush was raised by 5 million, but imports were revised higher by 10 million bushels. The carryout is now only 9 million bushels above the final 2012/13 carryout estimate and the stocks/usage ratio has dipped below 5.0% once again. With the US yield now sitting at 43.0 bushels per acre and many traders seemingly not looking for a big supply increase in the January report, the risk from a balance sheet perspective is still with the bears. However, if the final yield were adjusted up to 44.0 bushels per acre, this would add 151 million bushels to the bottom line. Until the January report comes out, spreads may need to work higher to slow export and crush demand. There continues to be talk of China canceling orders, but we would be surprised to see them cancel orders prior to early 2014. The South American crop has not passed its most important crop maturity stage, so if the current purchases are indeed a hedge against poor weather and production, it would make very little sense for them to cancel those purchases ahead of this important period. Weather forecasts remain favorable for nearly all of the South American growing regions. In other words, the current positive forces for soybeans are mostly temporary. In the December report the USDA pegged world ending stocks for 2013/14 at 70.62 million tonnes, up from 70.23 million estimated in November but below trade expectations of 71.65 million. This was still up 10.4 million from last year and up 15.4 million from two years ago. Brazil’s production was unchanged at 88 million tonnes. However, normal weather from here on in would leave a 91-92 million-tonne crop as a clear possibility. Argentina’s production was revised higher by 1 million tonnes to 54.5 million. This was less than expected. Many traders see production of 57.0 million as a real possibility if weather remains normal. With normal weather and a 1.0 bushel/acre adjustment higher in the US crop, world production could be revised higher by 7-8 million tonnes in the January report. The Brazilian government agency CONAB recently estimated that nation’s production at a record 90.03 million tonnes, versus a range of 87.9-90.2 million forecast in November. Soybean Hedgers Update: There seems to be significant risk of a major shift to a lower price level once the short-term tightness is resolved. 1) New crop futures can be sold or hedgers might look to establish forward pricing on any move to the $11.65-$11.72 zone basis November Soybean futures. We would suggest being fairly aggressive with this position if you are willing to come back into calls or bull call spreads as an offset to the hedge into the planting season. For example, while short futures or while holding cash forward, the hedger can consider owning something like a September $12.20/$13.80 bull call spread for near 40 cents. The spread should help offset a rally in the market after the core position (short futures or forward priced) is established. 2) Given the bearish outlook, hedgers might also consider buying the November Soybean $11.40 put and selling the November $13.00 call for a net premium paid of around 38 cents. The hedger will be fully covered on a move below $11.02, and the maximum price received would be $12.62. There is also some flexibility with this position. 3) For any leftover old crop, or for a more leveraged approach for some of the new crop needs, hedgers might also consider buying multiple units of the July Soybean $10.60 or $10.80 puts. With the negative outlook, holding multiple out of the money puts leaves plenty of flexibility (selling premium, taking profits, rolling to new crop) for the hedger ahead. WHEN INVESTING IN THE PURCHASING OF OPTIONS, YOU MAY LOSE ALL OF THE MONEY YOU INVESTED. WHEN SELLING OPTIONS, YOU MAY LOSE MORE THAN THE FUNDS YOU INVESTED. STRATEGIES USING COMBINATIONS OF POSITIONS, SUCH AS SPREAD AND STRADDLE POSITIONS MAY BE AS RISKY AS TAKING A SIMPLE LONG OR SHORT POSITION. YOU SHOULD BE AWARE THAT IN THE EVENT YOU LIQUIDATED THE LONG SIDE OF A BULL CALL SPREAD AND STILL MAINTAINED THE SHORT OPTION POSITION, THEN YOUR RISK WOULD BE UNLIMITED. 141 West Jackson • Suite 4002 • Chicago, Illinois • 60604 • 800-662-9346 • 312-786-4450 • info@HightowerReport.com • @HightowerReport Trading futures contracts and commodity options involves substantial risk of loss, and thus is not appropriate for all investors. Investors should carefully consider the inherent risks of such an investment in light of their financial condition. Page 5
  • 7. RISK DISCLOSURE WHEN INVESTING IN THE PURCHASING OF OPTIONS, YOU MAY LOSE ALL OF THE MONEY YOU INVESTED. WHEN SELLING OPTIONS, YOU MAY LOSE MORE THAN THE FUNDS YOU INVESTED. STRATEGIES USING COMBINATIONS OF POSITIONS, SUCH AS SPREAD AND STRADDLE POSITIONS MAY BE AS RISKY AS TAKING A SIMPLE LONG OR SHORT POSITION. YOU SHOULD BE AWARE THAT IN THE EVENT YOU LIQUIDATED THE LONG SIDE OF A BULL CALL SPREAD AND STILL MAINTAINED THE SHORT OPTION POSITION, THEN YOUR RISK WOULD BE UNLIMITED. THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION. THIS MATERIAL HAS BEEN PREPARED BY A DANIELS TRADING BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION FOR TRADES. DANIELS TRADING, ITS PRINCIPALS, BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT FROM OR CONTRARY TO THE OPINIONS AND RECOMMENDATIONS CONTAINED THEREIN. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS. YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD READ THE “RISK DISCLOSURE” WEBPAGE ACCESSED AT WWW.DANIELSTRADING.COM AT THE BOTTOM OF THE HOMEPAGE. DANIELS TRADING IS NOT AFFILIATED WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM, NEWSLETTER OR OTHER SIMILAR SERVICE. DANIELS TRADING DOES NOT GUARANTEE OR VERIFY ANY PERFORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SERVICES.