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1 Futures Analysis & Forecasting HightowerReport.com March 21, 214 Strategies for March 31st Report: Non-standard Options New, non-standard options at the CME can be great tools for commodity traders, especially ahead of key USDA reports. Global money market managers and hedge funds have been active buyers in agricultural markets so far this year, and this has been a major offset to concerns that the global grain supply is likely to increase significantly from last year. The CME Group offers a variety of option products for hedgers and speculators, and we will take a look at some of them ahead of the key USDA March 31st Quarterly Gain Stocks and Prospective Plantings reports. The market could see significant volatility with these reports. This would just add to the weather concerns that are typical ahead of planting for corn and soybeans and ahead of the key growing period for winter wheat Soybeans Daily Ranges on NOV The March Quarterly Grains Stocks figures will indicate the current pace of demand for the 213/14 marketing year, while the Planting Intentions Report will offer the first surveyed look at acreage for the 214/15 crop season. Fund traders, commercial end users, producers and speculators may want to take a look at using Short Dated New Crop Options and Weekly Agricultural Options as a way of enhancing their current option or futures positions or as a way of managing the risk associated with a possible surge in volatility and even a major shift in trend Corn Daily Ranges on ) Short-Dated New Crop Options 25 2 DEC Short-Dated New Crop (SDNC) options on Corn, Soybeans, Chicago Soft Red Winter (SRW) Wheat and KC Hard Red Winter (HRW) Wheat futures offer enhanced hedging flexibility and an array of trading opportunities for those seeking a cost-effective way to take a position in new crop futures contracts For a FREE TRIAL of Daily Research and Trade Recommendations go to HightowerReport.com Trade Recommendations Pre-open and Midday Audio Updates Fundamental & Technial Chart Library Daily Fundametal & Technical Analysis 141 West Jackson Suite 42 Chicago, Illinois Investors should carefully consider the inherent risks of such an investment in light of their financial condition. Page 1

2 March 21, 214 Over 1.39 million SDNC contracts traded since launch in June 212 SDNC Options as a whole Current Average Daily Volume (ADV) 2,89, +92% from Feb 213 SDNC Corn options: 1,555 ADV, +17% vs Feb 213 SDNC Soybean options: 1,251 ADV, +818% vs. Feb 213 2) Weekly Agricultural Options Weekly options provide users with increased flexibility in managing existing option positions. They provide a lower-cost way to trade through high impact events such as the March 31st reports using strategies with options that expire every Friday. These options have the same strike prices and tick values as regular options, and they can be a great tool for designing strategies that meet specific risk/ reward needs. SOYBEANS The soybean market remains in a steep uptrend, as traders believe that higher and higher prices are needed to slow US domestic usage and exports so as to avoid extreme tightness at the end of the 213/14 season. Bull spreading has also been very active, as the process of rationing supply has been (or is expected to be) accomplished by both the inversion of the nearby price to deferred prices and from higher flat pricing overall. May soybeans hit a contract high of $14.6 earlier this month, and prices appear to be consolidating ahead of the key March 31st reports. The transition from an extremely tight 213/14 season to a potentially burdensome outlook in 214/15 should keep the market volatile. Both the bulls and bears have very strong arguments in their favor. A surge in production from South America, heavy US plantings and the potential for a period of sluggish demand into the spring could spark a significant top soon. However, old crop ending stocks in the US are tight, and they could end up well-below last year levels, and the US weather is still uncertain for the new crop. Over the next week or so July soybeans will be focusing on the March 1st Grain Stocks report that will be released on March 31st. Demand has been extremely strong due to surging exports and strong crush demand, and the report could provide the market with an even tighter stocks outlook than last year. Remember, July soybeans ran up all the way to $16.3 last year, when the March 1st soybean stocks Million Acres Soybeans Daily Change on NOV Est Most Recent: 76.5 As Of 3/1/214 US Soybean Planted Acreage The Hightower Report 141 West Jackson Suite 42 Chicago, Illinois Investors should carefully consider the inherent risks of such an investment in light of their financial condition. Page 2

3 March 21, 214 figure totaled 998 million bushels. The current USDA estimate for total usage for the 213/14 season is 22 million bushels higher than last year, but traders are looking for March 1st stocks to come in lower this year, with early estimates of million bushels. On paper, we can see a number at or below 975 million, possibly as low as 96 million bushels. If the number comes in at 98 or below, the market will have a lot of work to do with bull spreads and flat prices to shift demand "down the road" as ending stocks projections will slip well below pipeline minimum. As of March 13th, cumulative soybean sales stood at 16.7% of the USDA forecast for 213/14 marketing year versus a 5-year average of 9.2% for that point in the year. Even if there are no more sales (and no cancellations) for the rest of the marketing year, total exports would come in 12.6 million bushels above the current forecast. If there were no other adjustments were made, ending stocks would come in at 42.4 million bushels, compared with the current forecast of an already-tight 145 million bushels. In contrast, trade estimates for planted acreage are coming in well above the USDA Outlook Forum estimate of 79.5 million acres (already a record high), with most estimates coming in at 8-83 million acres. A producer survey came in at 83.6 million. If we were to assume an acreage total of 82 million acres and a yield of 44.5 bushels per acre (last year it was 43.3 under rough conditions), we could see a jump in ending stocks to 46 million bushels and a stocks/usage ratio of around 14.1%, up from 4.4% for 213/14 and well above the 6-year average of 5%. Keep in mind that world beginning stocks for the 214/15 season are already projected at a record high. Recent Commitments of Traders report show that the net long positions held by large and small speculators is close to a historically high level. As of March 11th, this group was net long 161,76 contracts, which was the largest it had been since October 212. Soybean Option Strategies Preferred Strategy for Speculators: The market has seen a very strong rally into the reports, and speculators may be overextended on the long side. November Soybeans could see a break of $1.5 on normal spring weather and swelling global supply. Look to sell November Soybeans (currently near $11.77) and buy 2 of the Short Dated New Crop (SDNC) May Soybean $12. calls (which expire April 25th) near 15 cents each. There is expected to be a "wall of supply" but will this come into play for this USDA report or next? For 3 cents on the table, this position offers plenty of flexibility. In the event of a very bullish report, the trader may still make money with this trade. If the reports are bullish, one of the calls can be Million Bushels Ending Stocks - Million Bushels Ending Stocks (MMT) US Soybeans Ending Stocks vs. Ending Est 14 Est Crop Year Beginning Ending Stocks Stocks as % of Usage The Hightower Report Most Recent: As Of 3/1/214 US Soybeans Stocks as of March 1st Most Recent: As Of 1/1/214 World Soybeans - Ending Stocks vs. Crop Year Beginning On Farms Off Farms Source: USDA Ending Stocks 21% 18% 12% 9% 6% 3% % 3% 27% 24% 21% 18% 12% 9% Ending 141 West Jackson Suite 42 Chicago, Illinois Investors should carefully consider the inherent risks of such an investment in light of their financial condition. Page 3

4 March 21, 214 lifted on the initial rally and the other held to protect the short futures position. Traders might also consider buying the 1st out-ofthe money Week#1 call and also buying the 1st out-of-the money Week#1 put (expire April 4th). The trader should be in a position to react on a volatile report. Producer Hedgers: Producers who are not hedged should strongly consider owning Short Dated New Crop puts in Soybeans in case the market makes a major top on the report date. Consider buying the SNDC July Soybean $11.6 put (which expires June 2th) for around 32 cents. As an add-on, consider selling a SNDC July Soybean $12.5 call for around 2 cents. This will reduce the out-of-pocket cost of the hedge to 12 cents. However, it could force a short November Soybean futures position if the futures move above $12.5. CORN The corn market s setup for the March 31st reports is completely different. The trade sentiment was extremely bearish to start the year (with many traders calling for $3.5-$4. corn), but demand was much stronger than expected, and July futures rallied from $4.21 3/4 on July 1th to a high of $5.6 on March 7th. Speculators (both large and small combined) as of March 11th were holding a net long position of 125,123 contracts, which was near the middle of the historic range and up from a net short position of 225,612 contracts on October 29th. Unlike soybeans, the focus for the corn market for the USDA March 31st reports is clearly on planting intentions, as old crop supply is expected to remain adequate and there is no apparent threat of tightness for the end of the 213/14 season. Trade estimates are coming in around million acres, above the USDA Outlook Forum estimate of 92 million acres. A producer survey came in at just 9.9 million acres. Planted acreage last year was 95.4 million. If we were to assume that 92 million acres are planted and the yield comes in around 163 bushels per acre (last year s yield was under poor conditions), then ending stocks for the 214/15 season could come in around billion bushels with a stocks/usage ratio of around 14.8%. This would be up from 1.9% for 213/14 and above the 6-year average of 1.3%. Just a few months ago there was talk of even higher ending stocks (in the range of billion bushels) for both the 213/14 and 214/15, but the improvement in demand has changed that. Keep in mind that world stocks/usage ratio for the start the 214/15 season is projected at just 16.8%, compared with the 25 year range of to 33%. Million Acres Est Most Recent: 95.4 As Of 3/1/214 Ending Stocks - Million Bushels Ending Stocks (MMT) US Corn Planted Acreage US Corn Ending Stocks vs. Ending Est 14 Est Ending Stocks Stocks as % of Usage World Corn - Ending Stocks vs The Hightower Report 27% 24% 21% 18% 12% 9% 6% 3% % 5% 45% 4% 35% 3% 25% 2% 1% Ending The Hightower Report Source: USDA Most Recent: As Of 3/1/214 Crop Year Beginning Ending Stocks 141 West Jackson Suite 42 Chicago, Illinois Investors should carefully consider the inherent risks of such an investment in light of their financial condition. Page 4

5 March 21, 214 It is difficult to make an advance estimate of the March 1st stocks figure because the feed and residual usage numbers for corn is historically been a very difficult to determine for a specific quarter. In past years the market has seen very active trade on the day of the March grain stocks reports. In four of the past seven years, May Corn has closed limit up or down on the day of the report. (See charts.) This year traders are trying to absorb the news of the PED virus, the devastating effects on hog production and the implications for feed usage. This may be offset by the fact that corn is cheap relative to most substitutes this year. Feed usage is significantly impacted by profitability in the livestock feeding sector, and with pork, beef and milk at a record highs, feed usage could higher than expected. March 1st stocks last year totaled 5.4 billion bushels, a nine-year low. On paper, we can see a number near 7.1 billion bushels. Trade sentiment going into the report has many traders expecting the USDA to find more corn, as traders believe that the USDA estimate for feed usage is already too high. Corn Option Strategies Preferred Strategy for Speculators: Given the demand surprises to the upside all year, the potential for ethanol exports that would enhance usage, and the longer-term demand expectations from China, the slow but steady uptrend could continue. On the other hand, bird flu and PED issues might offer some pressure over the short term. The Week 2 April Corn puts (expiring April 11th) should work well to protect long positions into the report. The speculator can buy May futures and buy 2 of the Week 2 April Corn 47 puts for 9 1/2 cents each. If the report is bearish and the market sets back 3 cents, the trader will be in position to lift 1 or 2 of the puts and hold futures for a spring (late plantings) bounce. Billion Bushels US Corn Stocks as of March 1st Most Recent: 5.4 As Of 1/1/ On Farms Off Farms Source: USDA Corn Daily Change on DEC Producer Hedgers: Planting intentions could come in near expectations, but then again the rally so far this year could have attracted new acres. In addition, there appear to be 2-5 million acres that producers wanted to plant last year that are unaccounted for. Hedgers can forward contract 214 corn and then buy 2 May shortdated new crop SDNC Corn $4.9 calls for 11 cents each. USD / Ton Weekly Iowa Cash DDG vs. Corn vs. Soymeal vs. Oats vs. Wheat DDG Soymeal Oats Wheat Corn West Jackson Suite 42 Chicago, Illinois Investors should carefully consider the inherent risks of such an investment in light of their financial condition. Page 5

6 Open the Door to Short-Dated New Crop Options Trade USDA report volatility with precision and lower premiums With the planting season approaching and volatility returning to the Ag markets, now is the time to add Short-Dated New Crop (SDNC) Options to your strategy. Easier to use than traditional long-dated options, SDNC options offer enhanced hedging flexibility and more opportunity to trade high impact events on new crop markets, such as next week s USDA Prospective Planting Report. Ticker Codes Contract CME Globex Open Outcry Bloomberg Corn OCD SDF ODCA Comdty Soybeans OSD CDF ODSA Comdty Chicago SRW Wheat OWD WDF ODWA Comdty KC HRW Wheat KWE KWO KWOA Comdty Disclaimer 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 The Hightower Report is strictly prohibited. 141 West Jackson Suite 42 Chicago, Illinois Investors should carefully consider the inherent risks of such an investment in light of their financial condition. Page 6