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Check Out Our Featured Blog Posts!
Basic Mechanics of Agricultural Options
by Tim Chilleri
There are two types of options: calls and puts. A call option is a financial instrument that increases in value if the underlying commodity increases in price …
To read this blog post in its entirety, click here.
Trading Resolutions for 2012
by John Payne
As 2011 comes to a close, it is normal for all of us who participate in these markets to look back and review the trades we’ve made and the opportunities we’ve missed …
To read this blog post in its entirety, click here.
We value your feedback and comments. Please feel free to comment on these posts and view and comment on other dt Futures Trading Blog posts.
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commodity outlook
Upbeat Outlook for 2012.
If one restricts their views to the US unemployment rate, the US deficit and the mountain of European debt hanging over the global economy, it is easy to adopt a dismal view for 2012. However, if one instead focuses on a pattern of downside breakouts of weekly initial US claims readings (see chart), on the pattern of declines in the supply of unsold homes in the US and if one acknowledges the chance of slightly more accommodative Chinese monetary polices ahead, the outlook for 2012 improves quite dramatically. In our opinion, a Chinese hard landing and a serious setback in the US economy are significantly less likely than ongoing turmoil from the Euro zone sovereign debt fiasco. While the euro zone situation is probably a long way from a resolution, we do think that the crisis will end quietly after debt vigilantes grow bored with the lack of angst. Some people think some type of massive European bank fund is necessary to resolve the crisis, but it might only require a minimal upturn in economic psychology. In most every crisis (Chernobyl, 9/11, Fukushima, sovereign debt, etc.), the markets usually expect the worse. That has certainly been seen in the Euro zone affair. Therefore, we are hopeful that the Euro zone crisis will drift from the spotlight quietly in the coming weeks, perhaps because of a shift in attention toward Iran and the Middle East.
In short, if one can discount or moderate some of the drag on the global economy from the Euro zone, it might be just enough to improve the outlook for the Chinese economy. Our outlook is fairly upbeat, as China has continued to import impressive quantities of heavy industrial commodities. They also continue to hold the most prolific financial arsenal of any country in the world, with cash and foreign currency reserves estimated to be in the $12 to $13 trillion range! While the US continues to be granted massive borrowing capacity, countries like China and Russia (because of its Petrodollar flow) appear to be very flush with cash. Therefore those two players might be in a unique position to help the US economy pull the rest of the world through the Euro zone turmoil. However, the Chinese edge isn't limited to their cash advantage, as a chart of Chinese coal imports for the last 13 months (see chart) highlights a series of new monthly record coal import tallies, which in our mind is indicative of an economy with some forward capacity. Certainly one could explain away the record coal imports as part of a typical Chinese commodity stock rebuilding effort, but if Chinese officials were really sensing a dramatic slowing threat ahead, would they continue to restock a cumbersome industrial input at an aggressive pace?
Another angle that leaves us to be upbeat toward physical commodity prices is the fact that many commodity markets have already seen sharp corrections from critical highs. An argument that pushes us toward the bull camp is the fact that speculator and fund long positioning in many the commodity markets has come down considerably over the past two years. By looking at a chart of the non- commercial and non reportable (large and small specs) long positioning in a composite of non-financial commodities, it is clear that as much of 79% of the record long position in 2010 has been pushed out of position. A number of commodities enter 2012 relatively cheap, and they also appear to be facing a "good enough" economic track. The enclosed chart of 2011 action among various commodity markets suggests that natural gas, copper, sugar, cocoa and oats are due to post surprise performances in 2012, while cattle, RBOB, heating oil and lean hogs might be able to extend their stellar 2011 performances into the start of the new year.
Keep a pulse on the industry and access more commodity news.
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markets to watch
May RBOB Gasoline
The RBOB gasoline market is showing signs of leaving the fourth quarter price low as an intermediate term bottom. While the market remains concerned over sluggish US demand, there has been a notable increase in US exports that has kept pressure on inventory levels (see chart). We are also encouraged by the upside breakout in the May RBOB charts and are looking for an opportunity to buy the market on weakness.
Fall 2011 gasoline demand lagged behind 2010 and behind the 10-year average pace, largely in response to economic uncertainty in the US and unresolved debt conditions in Europe. During the same period US gasoline production remained near the upper end of its 15-year range, around 9.0 million barrels per day. It was a rather notable increase in US gasoline exports that helped keep gasoline stock levels a seasonal downward track. The EIA pegged September US gasoline exports at a new record high on the month of 529,000 barrels per day. That is more than two times the year ago pace and eclipsed the December 2010 high by 2.3%.
A number of factors worked to benefit the appeal of US gasoline on the world market. One of these was the large premium of Brent crude oil relative to WTI crude oil, which reached an extreme of $30 per barrel by mid-October. The relatively lower input costs for gasoline refined in the US made it more attractive on the world market. US refiners also enjoyed near-record refining margins, and that incentive to boost production also seemed pressure. While a high level of production might normally point to increasing stock levels, in 2011 it seemed that the excess gasoline production was exported.
The weekly charts showed RBOB finding support at a key Fibonacci retracement of the mid-2010 through early 2011 rally. A closer look at the daily chart of May contract shows the market breaking out to the upside of a 3-month consolidation pattern, which sets the stage for a dynamic and powerful move to the upside with an upside target of $3.10.
Because we are focusing on the May options, we recommend buying out of the money call spreads to help reduce the impact of time decay.
Receive daily information on May RBOB Gasoline trading strategies.
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Cocoa Strategies
The market started out 2012 with a shift towards a "risk on" mentality, which ended up providing an initial boost for many commodities. With signs of improving economic data and expectations that the Euro zone debt crisis will be resolved soon, rising macroeconomic sentiment has strengthened the longer-term outlook for several commodity markets. While a large portion of this upsurge was centered on energy, metals, and grain markets, other commodities have remained close to their lowest price levels of last year due to weak near-term fundamentals. Cocoa prices have been in a tailspin since early November and even with a late 2011 rebound have lost nearly a quarter of their value. Although cocoa may become one of this year's strongest "bull" markets, the current supply/demand situation may lead to prices having one more leg down that reaches new low ground for this downtrend.
While cocoa prices have lost 45% of their value during the past 9 months, March cocoa has been unable to retest the contract lows it posted in early December. The Ivory Coast export ban that led to prices reaching multi-decade highs early last year ended up creating a supply glut when the embargo was lifted several months later. With the Ivory Coast, Ghana, and Cameroon having all-time record cocoa crops last season, the excess supply does not appear to have been fully digested by global demand. This season's production in the Ivory Coast and Ghana has been running ahead of last season's pace, although there are concerns that extensive dry weather in the Ivory Coast could have a negative impact on late- harvested beans. Until the near-term supply/demand situation shows some vast improvement, March cocoa may be setting up for an extended slide well below a fresh contract low.
Receive daily information on Cocoa trading strategies.
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Corn Strategies
The corn market absorbed a period of negative news into mid-December but turned higher when the weather turned hot and dry in Argentina. After an 88-cent rally (15%) into early January, the market now faces a critical weather period for the mid-January to mid-February time frame and a set of key USDA reports to be released on January 12th. These two events will likely dictate price direction for the second half of January.
Argentina is currently trading a very dry forecast for the first half of January. Soils were very dry coming into the New Year, with most of the country seeing 50% or less of normal precipitation for December. The lack of rain in the forecast until January 10th or 11th in Argentina is a significant concern, as traders see nearly half of the crop pollinating at this time and stress could cause irreversible reductions in yield. As of January 4th, many traders had already cut yield by about 20% for much of the country.
Permanent yield damage looks more and more likely for Argentina's producing regions for the week ending January 8th, and this has left the market in a steep uptrend. The loss of 8-10 million tonnes out of world production should drive ending stocks under 120 million tonnes. This would push the stocks/usage ratio to a historic low.
While these are big losses, traders are also well aware that the US could see a
2-3 million acre jump in plantings in 2012. That coupled with a trendline yield of 164 bushels per acre (up from 146.7 in 2011) could send production sharply higher, up about 1.94 billion bushels or 49 million tonnes from 2011.
Traders expect a slight reduction in yield for the final 2011 crop production report on January 12th. They also suspect that higher feed usage this past autumn will result in lower than expected December 1st (quarterly) stock levels, which will also be released on January 12th. These two factors alone could drive the January 12th ending stocks estimate for the 2011/12 season down towards 700 million bushels from the 848 million that was forecasted in the December update. In addition, if the USDA lowers South American production because of the recent dry conditions there, US exports could be adjusted higher by 50-100 million bushels. This could drive the ending stocks down even further.
With the possibility of both world and US ending stocks showing historic tightness for the 2011/12 season, the market has significant upside potential "if" the weather remains an issue for the second half of January.
Another important ingredient will be participation (or the lack of participation) from fund traders. The enclosed chart shows the weekly net position of non-commercial traders less index funds. These trend-following fund traders have reduced their net long position to just 69,712 contracts from a peak of 372,756 contracts in late 2010. This trend will need to reverse and money managers and fund traders will need to become more aggressive buyers to expect follow-through to the upside from the recent uptrend. This is likely to occur if outside market forces turn more positive as described in the introduction to this newsletter.
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Hog Strategies
In our last issue, we reviewed the supportive supply outlook for cattle futures. We should also emphasize that the meat markets have grown more and more sensitive to global economic activity, the domestic economy and export demand. The hog market should see an improving demand scenario ahead if the general tone for commodity markets improves. If we see improving employment data in the US and a loosening policy for China into early 2012, China's import demand could increase. China has embarked on a major expansion in pork production, but until that gets going they could still look to US pork to help alleviate short-term tightness and restock their cold storage inventories. After a quiet November and December, China's buyers could get more active in the months just ahead.
In the wake of the December Hogs and Pigs Report, traders expect US hog supply in 2012 to be up 2% from 2011. But, per capita available supply could be up only 1%, and available supply of beef and poultry are expected to be down significantly.
By mid-February last year hogs had rallied to a peak of 95.00. While we may not run up as much this year, the tightening supply of all meat in the months ahead and a seasonal decline in pork production into the 1st quarter suggest that February hogs are likely to make another run at the 90.00-92.00 level if outside market forces cooperate. If the global economy avoids a Europe-led double-dip recession, the meat markets could rally, as the massive fund long liquidation selling from December reverses and talk of declining exports dissipates.
Pork production is expected to decline by 380 million pounds between the 4th quarter of 2011 and the 1st quarter of 2012. This will be the second largest drop in ten years. February hogs were recently trading close to a 250 point premium to the cash market. Normally the premium is around 500 points. Last year at this time February hogs were trading 1000 points above the cash market. With the smaller premium this year, a turn higher in cash prices could lead to a strong reaction in futures.
The sluggish market action in December plus much warmer than normal weather for the western Corn Belt for November and December left the weekly average slaughter weights for Iowa/Minnesota at the end of 2011 at a record-high level of 277.9 pounds. Weights typically decline after early December, but the weather did not cooperate this year. This could mean that pork supply may come in a little higher than expected over the near term. But once the extra weight issue is resolved, the cash market may be in a better position to begin to trend higher.
The Commitments of Traders reports have shown a fairly aggressive long liquidation selling trend in hog futures since late October. The trend-following fund traders' net long position (non-commercial less index funds) reached an all-time record high on October 25th of 57,697 contracts. The selling trend of that followed pushed the net long position down to just 18,791 contracts by late December. If outside market forces turn more commodity-friendly, fund buyers are likely to become more active buyers in the weeks just ahead. The market has some short-term supply issues, but these may be resolved soon, and the short-term trend may turn up in conjunction with rising open interest. For the month of December, open interest was down 35,661 contracts to end the year at 235,111.
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***This report includes information from sources believed to be reliable and accurate as of the date of this publication, 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 The Hightower Report is strictly prohibited.
Discuss Trading Strategies with Us!
If you’d like to discuss trade strategies to determine the best execution strategy for you regarding the market, contact us or call us toll free at +1.800.800.3840.
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| In this issue |
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| Trading tip |
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Use discipline to eliminate impulse trading.
Have a disciplined, detailed trading plan for each trade; i.e., entry, objective, exit, and stick to this plan unless hard data changes. Disciplined money management means intelligent trading allocations and risk management. The overall objective is end of year bottom line, not each individual trade.
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Daniels Trading displays margin requirements throughout the dt website? Simply look for the  symbol in the tool bar at the top of each page.
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Do-It-Yourself Guide to the MF Global Claims Process
Need help with your MF Global Claim Form? Get answers with our Do-It-Yourself Guide!
Receive step-by-step instructions to guide you through the MF Global claim process. Compiled by a seasoned commodities attorney, this guide* will help you with the following:
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The information released by Daniels Trading does not provide legal, financial or professional guidance, and at no time is any Daniels Trading employee permitted to provide such guidance. The information was merely prepared by Daniels Trading to assist clients as they fill out the MF Global Bankruptcy Claim Form. In the event that additional legal or professional guidance is needed, Daniels Trading recommends that all concerned customers seek out the advice of competent professionals.
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featured video
Gain Knowledge
One thing many traders and investors agree on is that “Knowledge is Power.” It’s that power that gives you comfort and confidence with however you’re approaching the markets.
Click here or anywhere on the image below to launch the “Gain Knowledge” video page on the Daniels Trading web site.
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upcoming webinars
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Scott Hoffman |
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Insights on Swing Trading |
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Thurs, 01/12 |
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03:30 PM CST |
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Review swing market trading analysis and research for the coming week’s market with Scott Hoffman - Senior Futures Broker and Educator. Unlike others who teach using stale data, Scott uses current trading scenarios for his futures market seminars. You can apply his dynamic techniques immediately! |
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about Daniels Trading
Daniels Trading is a relationship-focused commodity futures brokerage located in the heart of Chicago’s financial district. Founded in 1995, we have a history of providing effective and reliable trade executions to both individual traders and institutional investors around the globe. In addition to our focus on relationship and execution, Daniels Trading is a leader in providing ongoing education opportunities and resources for our customers.
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