Think About the World this Harvest Season

11/19/2013 6:00 am EST

Focus: OPTIONS

Daniel Gramza

President, Gramza Capital Management, Inc.

Now is the season for the US grain market, but Daniel Gramza wants you to have a global perspective before you begin to trade.

SPEAKER:  My guest today is Dan Gramza.  We’re talking about a seasonal trade that you might be able to take advantage of. Dan—grains, tell us about this.  It’s a good time at the end of 2013 here to trade this.  Tell us about it.

DAN GRAMZA:  Well, you know it’s interesting this time of year, especially in the Midwest and through the United States, the plains, and this part of the country, we are going through harvest, and a lot of the yields that we’ve seen so far have been higher than expectations.  The issue that we still want to keep in mind, which is we could get some volatility as we go in towards the end of the year.  There are some areas that we’ve planted corn late, and we planted it late because their fields were wet.  They couldn’t get it in in on time.  Now that crop is now going to come in later and the yields on that crop can give us some outlook in terms of do we have an unbelievable year or do we have a very good year.  The expectations are that those yields are going to be good, but there’s a long way from that thought to the reality of when they harvest it and, until they do, we don’t know.  So the next few months are going to be important.  The other thing we need to think is what’s happening in other parts of the world.  What are the grain markets doing there?  We’ve seen some areas—you know, if you look at Australia, they’ve done pretty well.  If you look at Ukraine for wheat, they’ve done well.  Russia the same thing, so what is that global perspective and where is our demand?  Anything unusual.  For example, Tim, I always find this interesting to me, is the country that is the largest purchase of wheat is Egypt.  So, as we look at Egypt and we think about the current political conditions there, you know, where does that fit in to that demand.

If we look at Japan and China, they’re large consumers of grain.  China, which was basically in the past, we did not import wheat.  It does now.  It does now because their consumption of protein has gone up over 500% in just the last few years, so our demand picture for the agricultural products really is changing, and so that’s where this volatility can come into play.  Our products compete with other parts of the world as well.

SPEAKER:  Alright, so if I’m not sure exactly what the actual yields are going to be, but I want to play this.  Is there a way I can hedge my bias, perhaps, if I think it’s going to be a great season, prices may come down.  How can I get into a trade and still be protected?

DAN GRAMZA:  The way I guess I would approach it, if you want to have a protected type trade that’s fixed, would be to look at options, and what we could with that was when we see price starting to break down from the current ranges that we’re in because of this volatility that we’re talking about.  But once we see it taking a move—that simple buying of a put; near at the money put, expiration beyond the current, is what I would look at.  I would also look for performance within that, within the next two to five periods after you initiate the trade.  Those would be a way to participate in a directional move, but with limited risk.

SPEAKER:  Dan, thanks for your time.

DAN GRAMZA:  It’s always good to be with you Tim.

SPEAKER:  You’re watching the  Moneyshow.com video network.

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