Grain Spreads: Lack of Specifics

Sean LuskGeneral Commentary


News of US/China trade progress and a late Friday pledge by China to secure 10 MMTs of US soybeans lifted CBOT futures last night and early morning. That was as specific news for any US commodity so far.
We cautioned in last week’s post that a lack of specifics regarding a trade deal and extensions of previous deadlines could be seen as bearish for demand. Lack of clarity on any new Chinese buying spree regarding wheat, corn, and livestock gave little reason to buy. Its price discovery now in grains.Wheat led the complex lower while rallies in corn continue to get sold. Beans and Meal continue to over perform versus historically record massive ending stocks. Still the opportunity exists that either one or both sides announce something specific as to the amounts of US Ag, Livestock, and Energy that China could purchase due as part of an agreement in the months and years to come. Until then we need reasons to buy for a turnaround in wheat and corn.

KC Wheat Weekly Chart

Demand for wheat has surpassed expectations by the barest of margins while world wheat values have fallen in the last two weeks. This isn’t longs caught on this break given the large increase in open interest. This is managed money and trend and index following funds selling rallies. Should we hold here, look to be a buyer later in the week. Once we hit first notice day Thursday, I think this market turns higher into month end and a new batch of data into next week. There are too many question marks with our winter wheat crop and weather issues abroad to bury this market to 2016/2017 lows in my opinion. Not to mention trade deals and pacts long term that if finalized could mean lower ending stocks.

Trade Idea: This is aggressive but I would take a shot at buying the 475 call and selling the 425 put, May KC wheat options. Spread settled at a 2.7 debit. I would bid under the market at even money. A close under 430, May futures and I would be out. Im playing an end of month bounce, and perhaps more. May Kc wheat has made three recent highs at 470. If we take that out, look for a rally to 487. A close under 445 basis May takes us down to 424.6 in my view. I think some of these markets particularly wheat, corn, and hogs would like to see some specifics before a major demand based rally takes place.

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