Grain Spreads: Pre-Report Thoughts

Sean LuskGeneral Commentary

There is actually talk this year that ending stocks for soybeans and corn could end up the same at around one billion for each when its all said and done post harvest. This noise comes on decreased corn acres and reduced yields because of late plantings in the Midwest. While hard to fathom, its certainly not out of the question. The USDA is out with their monthly supply/demand report Tuesday at 11 am central. The average trade guess for yield for corn comes in at 171 bushels per acre (BPA), down 5 BPA from the May 2019 estimate at 176 . New crop ending stocks come in at 1.772 vs 2.485 last month. An almost 700 million bushel drop in one month. The USDA has been overtly bearish for corn prices vs the average trade guesses in the last three gov’t reports. Whatever the numbers, the trade will be examining the weather reports for continued planting progress and early growing season development. In my view it’s going to get more volatile until the market has a sense of what this corn crop is or isn’t. That might not be known until late July/early August as key yield development and pollination gets pushed back due to late planting dates. While planting looks to get under way at a greater percentage due to cooperating weather late this week and this weekend, we are still significantly behind in Wisconsin, Illinois, Indiana, Ohio, and Michigan. If some of these areas stay way behind in planting after next weekend, we could see a sizable shift into bean plantings. Which again has some talking that post harvest ending stocks maybe the same for beans and corn. I would be looking at option strangles going forward in corn. This is taking positions and having exposure on both sides of the corn market. We are looking for volatility in the near and long term. I think its one of those years where one could take profits on both sides given the price movement.

For a report day play consider the following strangle. Buy the July 4.05 put for 4 cents. Buy the July 420/450 call spread for 6 cents. Strangle cost 10 cents plus commissions and fees.

Longer term: Buy the Dec corn 450/500 call spread for 12 cents. Buy the 390 put for 10 cents. Cost 22 cents, plus commissions and fees.

I’m leaning towards the long side here and have plenty of ideas that are more aggressive. I would hope that tariffs do not go into effect with Mexico on Monday. Politicians entering in and affecting price direction at this scale is extremely frustrating. Mexico is the number 2 buyer of US corn behind Japan. Enough is enough. Even still supply side concerns and their validity this crop year should overshadow this tariff nonsense. We will see and its a big reason I’m advocating buying premium on both sides of corn at this moment.

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