Grain Spreads: Remember When

Sean LuskGeneral Commentary

Last Summer’s fears of a continued trade war fueled thoughts of weak demand amid ample supplies. Ending Stocks estimates for soybeans swelled to over One Billion bushels. Yet last year’s growing issues gave us lower yield and almost a billion less bushels than the 18/19 crop year. Weak demand was offset with a 25 percent cut in supply. Ending stocks still sit at a comfortable 475 million bushel supply. The Jan 10th crop report gave us the USDA’s first look at production/yield and ending stock numbers from last years crop (19/20). They raised yield and ending stocks for both corn and beans despite an unprecendented amount of bushels that were left unharvested. Further revisions will follow as I view this last report as a rough draft from the USDA as bean ending stocks were left unchanged from December. The market is currently staring at a bumper crop of beans produced in Brazil. Harvest is just beginning as much of the crop was late getting in. Without any signifiant purchases from China despite the Phase 1 agreement, Soybeans have dropped from an early January high of 961 to 888 this weeks low. The coming Brazil crop has pressured in my view. The 888.2 level this week is a major level in my view. (see upward arrow) Should we hold it, I look for a retracement to 920 on the charts. Thats approx half way back of the January break and where the 200 day moving average sits. Why would we rally? Weather in Argentina and new demand comes in are two reasons. Commodity prices though have been sold en masse across the Board since Friday. Coronavirus spreading in China and finding its way around the globe is the likely culprit of the break in price in my view. The uncertainty and fears of this situation worsening causing a downgrade of global commerce/ trade sent commodity sectors reeling. Because its China where this Flu strain emanated, the thoughts of no near term demand for US AG and Livestock had longs running for cover amid new shorts entering the market.

It seemed at least for today that those fears began to subside. Im looking at opportunities to be long for another run here in beans or the soy complex if support holds. Weather in Argentina has been dry for the central and southern growing areas. Private estimates have already cut their corn crop 2 million metric tons. Last week saw our biggest export sale of bean meal in 30 years, over 640K metric tonnes. Due to economic issues and rampant inflation, Argentina’s largest meal crusher has been tempoarily been shut down. Both the weather there and increased sales for meal in the US bear watching. Should the upper trendline hold, beans are a buy in my view. Should we close under it, I look to sell with the first target at 876 and then 856 basis March futures. Below is a chart of July/Dec meal. The crop marketing year for meal is October 1st. This is a classic old crop/new crop spread. Should meal rally here, a move towards parity is likely in my opinion. I would buy at 6.2 July under with a stop loss at 7.5 July under. A $130.00 risk plus commissions and fees. Or near term buy the March 310 call for .80. This option has an $80.00 cash value plus trade costs and fees. To me cheap bets, looking for turns and bottoms. Meal was simialrly priced at current levels when last years ending stocks were thought to be over a billion. Remember when? Currently they sit at 475 per the USDA. Let the charts be the guide here.

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