Grain Spreads: Take the Collection

Sean LuskGeneral Commentary

Interesting times here across all market sectors. Grains have been no exception. Early frost/freeze events that might of caused sizable reductions in production for corn and beans this year hasn’t shown up. We have burdensome ending stocks currently and yet the market wont break. Recent demand has been good. China most recently have been in with some good will purchases the last two weeks ahead of their national holidays Oct 1st. We just signed a trade deal with Japan and NAFTA 2.0 has been approved by Canada and Mexico, awaiting action and ratification by the US Congress. (Hurry up and wait for our lawmakers for signage). There is a little weather worry developing in South America regarding drought, but its so early in the planting season in the Southern Hemisphere that its not a major concern yet. Will we get harvest pressure or not? Harvest will begin in earnest later than usual this year. Shifts in weather could be potentially problematic that could bring more production problems and decrease ending stocks/production for beans and corn. I’m worried about the demand side for both crops long term. South America will plant as many acres as possible given the shift in demand tilting in their favor after the tariffs. Make no mistake though this shift began way before the trade war as South America has steadily gained grain market share in the last decade. Yet we are still going to be supply side driven until harvest gets to 60 to 70 percent completed in my view. We probably wont have a realistic view on harvested acres until the January report if harvests get delayed deep into November. Funds have been short the Bean market since late January/early February. This Springs low co-incited with funds pushing to a 178 K short. By late June short covering over late plantings took them to 45 K contracts short. Eerily that’s where the managed money short currently sits, about 45 K short for beans. Either they add to this position which could push the market lower, or they flip to a long position. If that happens we could see a sizable rally in my view.

Game plan: Lets look at July 2020 Corn and Bean options. I advise taking a major collection on both here. It involves selling $1.00 wide put spreads. For beans we can sell at 85 cents or percent where the market at option expiration can have no more than a $1.00 wide move. Sell the July 2020 11.00 put and but the 10.00 put for 85 OB. Use the collection of $4250 minus commissions and fees to potentially buy puts in March at the 880 strike to protect the downside. Or use the collection to buy Jan 930 calls and double up on the long side. If not July, one could look to May option and sell the same spread (11.00/10.00) at 90 cents. These to me are good bets in that the percentages are in your favor at these thresholds where I would speculate that we can buy them back cheaper than what we sold them for. This to me is what we do this for. Look for these pricing disparities long term and look to take advantage. For corn , same strategy. Sell the 5.00/4.00 put spread in July 2020 corn for 80 cents. That is a 4 K collection minus commissions and fees. Spread has twenty cents of risk. Use the collection perhaps to buy a March 20 380 put for 10 cents. Or to double up and buy the July 420 call for 14 cents. There are multiple possibilities here utilizing the selling of the covered premium spreads.

Friday we have a stocks in all positions report at 11 am. It is also month and quarter end. We will be covering pre-report estimates ahead of it on tomorrows free grain and livestock webinar at 3 pm Central time.. Signup is free and a recording link will be sent to your email. We discuss supply, demand, weather, and the charts. Sign Up Now