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Sidwell Strategies Week-in-Review CommodityBuzz: Harvest is here


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Howdy market watchers! Wheat harvest has arrived in northern Oklahoma! Though it has been a slow start with many varieties not yet ready despite the 100+ degree temperatures, this next week will see a lot of pickup in activity. It is a harvest much different than last year when rains significantly delayed progress with very muddy conditions throughout. While this year is off to a more normal start with good test weight and yields at least in northern parts of the state, dry conditions are creeping back in with no precip in the forecast. An open couple of weeks is however welcome for harvest, but brings concern for double-crop conditions. Have faith. On the protein front, Ive heard quite a lot of variability with higher protein in the south along with lower yields impacted by the freeze. For what little has been cut in northern parts of our great state, Ive heard protein levels ranging from below 10 percent to above 12 percent. For producers that put on plenty of nitrogen including a late application, protein levels may hold, but I suspect there will be plenty of lower protein fields as well. All in all, I believe were in for a higher yielding, adequate test weight, but lower protein crop that should extend up into central Kansas. Should this materialize as more acres are harvested, be cognizant of the basis at your delivery point as basis bids could weaken if proteins are lower or see discounts applied to protein levels sub 10.5 percent. Lower protein overall should also then result in widening protein premium spreads. Just keep an eye on it and make sure you know how the basis is changing as harvest progresses. It was a volatile week in the futures market that started with a 2-day, 20 cent sell off in July KC wheat before basing at the $4.50-level followed by a 2-day, nearly 27 cent rally touching on the 50 and 100-day moving averages between $4.76-4.77. A weaker US dollar as well as a dryer outlook for Europe and the Black Sea region sparked the rally. Despite Fridays profit taking, it was an inside day (lower high and higher low) on the charts to finish the week that sets things up for a technical breakout next week although the direction is unclear. An upside breakout would have been clearer with a higher close off the lows Friday, but even if we should open up Sunday night weaker from US harvest pressure, we are still forming a bull channel (higher lows and higher highs) from the May 20th lows. I believe the $4.90-level could be in the cards on July KC wheat, but we first need to break above the 50 and 100-day moving averages at $4.77. Be watching that level to signal further upside. As I covered extensively in last weeks article, if you are planning to or need to sell wheat at harvest that locks in the futures, basis and protein premium, you can replace those bushels in 5,000 bushel increments with call options. If the market goes up, these call options gain in value. Once the market reaches resistance levels or your desired profit is reached, you sell the call option to capture the gain. These funds are then sent back to your bank account where you can add it to the funds from your sell of physical grain at the elevator to divide by the number of bushels you sold for an increase in your sell price. Should you sell your physical grain and buy call options and the market doesnt go up, first of all, youll be glad you sold your grain and the most you can lose is what you paid for the call option. Call options can be bought at any level. They can cost 25 cents or 10 cents. It just depends on how far from the market you enter. The further above the market you are the cheaper the option. Its much like an insurance deductible with higher deductibles resulting in cheaper premiums, but the amount of the deductible is on you. As an example, if the underlying futures are at $4.70 and you buy a $4.70 call option, you have a zero deductible. If you buy a cheaper $4.80 call option, you have a 10-cent deductible meaning that the market has to go up 10 cents before that $4.80 call option is in-the-money. When youre calculating what you want to spend on a call option, think about what it costs to hold wheat waiting for higher prices as a guide. Your costs of storing wheat include storage (4-5 cents per bushel per month) and interest (1.5-2.0 cents) and should the basis weaken, protein premium or futures price weaken during this time, you still have the cost of storage and interest. By selling your wheat at harvest, you stop both storage and interest cost and invest those savings in a call option with the potential to add to your actual sell price without the risk of the basis or futures price going lower on you while still holding the physical wheat at the elevator. Again, the risk being that the market doesnt go up and you lose whatever you paid for the call option, but it is calculated and cannot increase further than that which is not the case if you hold your physical wheat hoping the market goes higher. If you do choose to hold your wheat, you can also buy a put option to protect against the futures price going lower, but it does not protect against a weaker basis or protein premium. Give me a call if you want to implement this strategy in your operation this year. It is straightforward and we can get it in place quickly. USDAs next monthly Crop Production and WASDE report will be released on Thursday, June 11th. We believe they are too high on the US winter wheat number and may see a slight reduction. Most watchers will be paying attention to the corn and soybean demand numbers with no major issues in planting progress. Corn and bean exports have picked up recently despite concerns over US demand, especially for corn. With managed funds still adding shorts in corn with virtually no weather premium priced into this market, any change in weather or improved demand numbers could trigger a short covering rally. December new crop corn settled Friday above $3.45, supported by oil prices that were up over $2 on Friday after a strong jobs report. China continues to buy US soybeans even after the government told all state-owned enterprises to halt purchases. This action and recent buying indicates that China needs the beans as their economy and hog industry recovers. November new crop beans finished the week near $8.80. Cattle markets chopped sideways this week within a fairly tight range. The outlook for the economy continuing to reopen is critical for the cattle market as large numbers of heavier cattle needing to be processed hang over this market. At these levels, Im still of the view that Feeder futures may be too high relative to the Live contracts with Cash Fats trading at a significant premium to the June futures. The Live cattle market will have to converge by the end of June. Feedlots need the June futures and back months to move higher in order to be able to hedge at a profit the Feeders theyre buying. April exports were released by the USDA on Friday with beef exports down 3.4 percent versus last year while pork still stronger on China buying. Higher beef prices was partially the culprit as consumers traded down. A weaker US dollar is what we need to boost these markets as well as the grains. Give me a call at (580) 232-2272 or stop by our office to get your account set up and discuss strategies to protect your exposure to these markets. It is never too late to start and there is no operation too small to get a risk management and marketing plan in place. Remember, I am on-site at the Enid Livestock Market on Thursday, sale day although this is the last week until mid-July. Wishing everyone a successful trading week and safe harvest ahead!

Brady Sidwell is a Series 3 Licensed Commodity Futures Broker and Principal of Sidwell Strategies. He can be reached at (580) 232-2272 or at brady@sidwellstrategies.com. 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.



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About the author


Brady Sidwell is the Founder and President of Sidwell Strategies, Enterprise Grain Company, Enterprise Grain Malt, Sidwell Solutions, Sidwell Seed, 81 Feed and Seed, Sidwell Transport, Arbitrage αlpha Solutions and co-founder of Enid Brewing Company. Mr. Sidwell is also a Limited Partner and member of the Advisory Board of Germin8 Ventures, a Food Tech Venture Capital firm based out of Chicago, and a founding partner of Ninja Ag, LLC, a precision agriculture technology business that creates variable-rate nutrient applications from corrected NDVI imagery. Mr. Sidwell was recently appointed to the Board of Directors of the Kansas City Federal Reserve Bank, Oklahoma City Branch.
 
Prior to his recent change in becoming an entrepreneurial business owner and commodity broker, Mr. Sidwell was Vice President of Global Strategy, Mergers & Acquisitions for the OSI Group, based out of its headquarters near Chicago. He first joined the company as VP of Corporate Strategy and Business Development for the Asia Pacific, Middle East and Africa (APMEA), based in Hong Kong. At OSI, Mr. Sidwell was responsible for spearheading global strategy and M&A.
 
Before joining OSI, Mr. Sidwell was Head of Food & Agribusiness Research and Advisory for Rabobank in North East Asia. He was responsible for cross-border F&A strategies for companies and investors across various sectors in the supply chain. While at Rabobank, Mr. Sidwell appeared regularly on Bloomberg, CNBC and Reuters TV to discuss the impacts of global and regional food & agriculture developments on Asian and global markets.
 
Prior to Rabobank, Mr. Sidwell worked on project teams at the U.S. Embassy offices of the U.S.D.A. in South Korea and Thailand. He holds a Bachelor of Science degree cum laude in Agricultural Economics with a focus on International Marketing from Oklahoma State University and a Master of Economics degree from the University of Hong Kong where he studied as a Rotary International Ambassadorial Scholar to China. Mr. Sidwell was raised on a family farming operation in Goltry, OK, where he lives with his wife Emily and their dog, Daisy. He is active in his community as a Rotarian, Ambucs member, Advisory Board and Investment Committee Member of the Cherokee Strip Community Foundation, Class 31 of Leadership Oklahoma and the Board of Governors of the Oklahoma State University Foundation.

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