Grain Spreads: In the Red

Sean Lusk General Commentary Leave a Comment

We started the week with a mass sell-off across the commodity board except for grains as short covering ensued in corn, beans, and wheat on Monday. Today prices traded back in the red, albeit they were small losses led by wheat. The heightened ten percent tariffs announced last week and China’s proportional response of eliminating future ag and livestock buys may erode demand in the weeks and months to come. Which leaves bullish weather events for grains as maybe the only realistic event thats scares the bears out of their shorts. I posit that if China stays true on this pledge to source commodities from anywhere but the US, that a likely outcome would be that the US becomes a port of origin for those countries feeding China with their new found demand. This shell game is bearish from a demand standpoint for US producers in the near term but its nothing new regarding the global AG trade. It’s been going on for years. Prior to the trade war and currently, China was allowed to cancel previously made sales for future shipment and buy elsewhere. Now they have signaled for the foreseeable future (potentially) that they plan to do so moving forward, eliminating a sizable point of origin. Brazil and Argentina would be the largest benefactors of both Ag and Livestock sales in the Western Hemisphere, as they have been, while EU nations and Ukraine and Russia across the pond. The Chinese are scheduled to return to Washington in early September. We will see if that happens, but from a demand standpoint, it may remain dismal in the near term.

We have a major grain report on Monday the 12th at 11AM. Its my opinion that the USDA will be a little more liberal in their acreage numbers especially for corn. We will see. They were taken to task on their end of June estimate and rightfully so. An hour after the release they admitted they would recount the acres, as they failed to do so in June with phone surveys asking what farmers would plant instead of what they did plant. For those looking at hedge opportunities longer term consider the following spread trade for corn. The chart looks like a near term bottom may have been made. July 20 corn/Dec 20 corn. It traded to 56.4 over in Mid-June and recently bottomed at 12.4 cents July 2020 over on Aug 1st. The Spring low on the spread was 3.4 cents July 2020 under in early May. This is a classic old crop/new crop corn spread where one can lock in some of this years production by selling it. First resistance is at 26.4 cents and then 40 cents July 2020 over. While the chart looks it could push to higher levels, I think for a hedge opportunity we need to keep a watchful eye here. If grain prices fall apart down the road amid weakening demand, the premium here is eventually going to be sold in my view. I’ve seen the July/Dec spread push to 30 cents under in years past. Sell rallies for percentage hedge should we get them is the plan here. Or a close below 14 cents July 2020 over.

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