Crude Oil finished day 2 of its blood bath stage which will mark the end of this intermediate cycle which began back in November with the Trump election. A blood bath stage in commodities is the period in which capitulation occurs. Its a sentiment cleansing event which will punish the longs. All the bulls are trying to exit the oil market at the same time which will end in extreme pessimism and the market running out of sellers.
In early May, oil had a selling event which only lasted a day. You cannot push a commodity into overbought or over sold territory in a day. It usually takes 5 to 7 days. You have heard me say it before, but the rally out of this intermediate cycle low will have the potential to be very large....one that could take oil quickly back to $52-54 which would only be at the 200 day moving average. The last rally out of an ICL back in November took oil up $13 on its first daily cycle. If this cycle bottoms at the 39 or 40 level, a move back to the 200 day moving average would be on par with that.
The problem the last time I recommended the strategy was that we did not have pessimism at extreme bearish levels yet. We still do not have the pessimism today we need for me to recommend the trade, but we should at or below 30 after another 4-5 days of this sell off.
If oil rallies $13.00 in a synthetic trade, it means a 1,000 barrel oil contract made $13,000. Equalizing the margins of oil, corn and soybeans, we would see a $.82/bu benefit for corn and a $2.02/bu benefit for soybeans. Now is the time to check yourself and see if this is something you have the stomach for. Barring a major weather event, I doubt we see the kind of rally you will need to get the price of corn and beans to profitable levels. If you can make $4.00 corn and $10.00 soybeans out of this market, you must have a darn good basis someplace.
As with any trade of this nature I recommend, there will be stops in place to manage the risk. One thing I am learning is to make the stops wider to allow for volatility so we are not swept out of our positions. Still yet, the risk will be relatively low and the reward very high. I will be diagramming the trade over the weekend, so expect a follow up post to this one then or early next week.
If you need a brokerage account, you should open one this week. This link will take you to where you need to go to open one with RJ Obrien if you wish to open one with me. You won't need to fund the account until you make the trade.
With the markets going nowhere I have not had much to write about lately. The wheat puts are expiring today, so I thought this might be as good a time as any to update the 2017 grain marketing track record.
I have yet to make a cash corn sell recommendation. I am still awaiting a bump in price, but even if I recommended selling all 2017 corn today, the corn sales price looks pretty good when you add in the synthetic trades I recommended.
The first synthetic trade I recommended was back on December 7. I had recognized that corn was going to grind sideways for the foreseeable future and wheat as well. Because wheat was at a recognizable intermediate cycle bottom, selling wheat puts looked to be a pretty safe bet. We sold the puts for .35 per bushel on all corn bushels we planned to grow. These options expired on February 25 at a price which allowed us to keep all the premium we collected.
The second synthetic trade began on 1/9/2017 by shorting oil. The trade concluded on 3-28-3017 when the position was stopped out at our target. We had a few other entry attempts which ended in getting stopped out which cost us a few cents, but the trade netted .33.
The third synthetic trade I recommended began on April 25 when I recognized that wheat was once again at an intermediate cycle low. I recommended the selling of wheat puts against your corn and soybeans and collect .31. This position expired today and was profitable, keeping all the premium we collected.
Our fourth and final synthetic trade began on May 9 when we went long crude oil. This was a good trade because the risk was easy to manage but was kind of iffy because the sentiment levels were questionable. The trade worked out however and we made $1500 before being stopped out on May 26. We tried again on May 30 because of the ease of managing the risk but were stopped out for a $400 loss. Net on this position was $1100. When divided by 18000 bushels of corn, this was good for .06 cents.
1. 12/7/2016 - sold wheat puts which expired 2/25/2017. .35
2. 1/9/2017 - Shorted crude oil and stopped out 3/28/2017. .33
3. 4/25/2017 - Sold wheat puts which expired 6/16/2017. .31
4. 5/9/2017 - Long crude oil and stopped out 5/26/2017. .06
Total boost to corn marketings from synthetic trades 1.05
When adding the synthetic positions to current futures price levels, we are tickling at $5.00 per bushel. There could still be one more synthetic trade left before I am finished with 2017 corn. I am still expecting December corn to reach $4.20. If that happens, I will price all the corn netting $5.25 per bushel. This equals 125% of the maximum price of the December corn contract since the summer of 2015. That's pretty good!
In hindsight, I should have been more aggressive selling cash beans back in the winter. Because of the synthetic trades, we should still finish well above $10.00 per bushel on soybean sales.
I have made several recommendations on soybeans so bear with me:
1. June 8 2016, sold 10% of expected 2017 production at $10.05
2. Nov 28 2016, sold 10% of expected 2017 production at $10.36
3. Jan 12, sold 30% of expected 2017 production at $9.95
4. Jan 12, bought serial puts on 50% of 2017 for .10
5. February 7 was a bull call spread on 100% expected production costing .15 which expired worthless.
6. April 25, sold wheat puts which expired 6/16/2017 adding .31
7. May 9, long crude oil synthetic position. Stopped out on 6/26/2017 adding .17
The combination of option strategies and synthetic positions have added .28. The average cash price of the soybeans we have sold so far are $10.05, so we are at $10.33 on 50% right now.
We are just entering the peak time of the weather markets. If soybeans can get back to the 200 day moving average at $9.81 I will probably sell the remaining 50% of the beans. That would give us a total average price on 2017 soybeans of $10.21, which happens to be at .9789% of the peak price of the November bean contract since 2014. That is not a bad spot to have all your 2017 soybeans priced!
I was certainly early when I announced that the corn rally was beginning a few weeks ago, but the premise is as true today as it was then. Looking at today's corn chart I see two things. First, the size of this coil is truly remarkable. Secondly, price is breaking out. The larger the coil, the more explosive the price movement tends to be on the breakout.
Sentiment Trader made this observation: Agriculture is a market that has performed so poorly in recent years that it's basically an afterthought. It's easy to find a number of fundamental reasons for the steady slide lower, and essentially all of those continue to point to lower prices.
But here's the thing - the smart money isn't buying those arguments. At least, not for a while. The latest Commitments of Traders data shows that large commercial hedgers have continued to hold a net long position in a variety of ag contracts. By definition, these traders use the futures market to hedge their exposure to the underlying markets. In ag products, that usually means that a hedger is a producer of the commodity, meaning they are basically "long" the commodity. So it's extremely unusual for them to also be long the futures contracts.
The PowerShares DB Agriculture Fund (DBA) is the most popular fund based on these commodities. That fund is itself based on an index from Deutsche Bank. Exposure to the 11 different ag contracts will vary during the year, and each November is reset to a base weight. Most of the contracts have about a 12% weight in the index.
With big declines in several of them in recent weeks, hedgers have picked up their buying interest and are now have the most exposure in over a year. Going back to 1988, when hedgers were holding more than 10,000 contracts net long, the DB index advanced by an annualized +13.1%. When they were short by 10,000 contracts, it returned an annualized -2.1%.
We can see that in the past few years, the DBA fund has halted its slide when the hedgers became net long. Their continued buying interest should serve as a floor under the fund in the weeks ahead.