Grain Spreads: Waiting Game

Sean LuskGeneral Commentary

Interesting price movements this week that so far have resulted in minimal price movement for corn and beans this week. While there has been some positive trade talk regarding Chinese Ag purchases and perhaps a signed phase one agreement in November, harvest pressures in my view emerge in the Midwest. To me that’s the battle with prices for now. For the last few months I have been advocating selling out of the money put spreads in both corn and beans, essentially buying next years crop. In my opinion, I believe this years corn crop has been overstated. From the onset, the Gov’t has been overstating planted and then harvested acres. Which in my view has inflated production. Yield is the variable that’s hard to quantify right now. Some private forecasters have corn at 166 to 167 while others are above 169. The USDA has it at 168.4, the October estimate. Yield is a tough one given the late plantings and terrible weather in the Northern growing areas, prior to much of the crop reaching maturity. Regardless of my opinion and others, I don’t think we will fully know until the January report or even the March 2020 quarterly report on what the corn crop is or isn’t. Any bullish surprises would result in higher prices in my view and put pressure on the 20/21 crop to produce. Just my opinion here.

While corn seems too optimistic, beans have been for the most part pessimistic or seen as bullish by the trade given the numbers from the gov’t versus market expectations. Last years beans production at 4.42 billion bushels. This years production coming in at 3.55 billion. Will late season weather in the Northern growing areas knock this years crop down to a billion bushels under last year? Ending stocks sit at 460 million bushels per the October report. You might recall that two crop seasons ago (2017/18), final ending stocks came in at 438. The last crop year prior to the tariffs. Drought in Argentina that year was a big reason beans traded to 1082 in the April/May 2018 time frame. Funds have taken notice in my view amassing a long position of 63 K contracts. While short covering has emerged in corn, with funds short about 60 K, down from 160 K in early September in my view.

As I mentioned earlier, I would look to take advantage of some option spread pricing and take a collection right from the get-go and if need be use the dollars collected to buy downside puts or double up the long side and buy calls. Let me explain with soybeans first.

January 20 beans: Sell the Jan 20 1050 put/buy the 1000 put. Sell the spread at 45 cents. The max loss on this spread is 50 cents. You are selling at a 90 percent threshold. Risk here is 5 cents plus commissions and fees. Note: I don’t think that Jan beans are going to 1050. However what I think and where prices end up going could be two different things. I can use the collection of 45 cents in this instance and buy the 1000 Jan 20 call for 7 cents. This increases the risk to 12 cents plus commissions and fees. What I am looking for is for Jan 20 beans to trade to 994. This level is a fifty percent retracement from the 2016 high to this years low. For a producer, one could use the credits to buy puts or put spreads lower. For example, buy the 960 put basis March 2020 for 33 cents and collect 12 cents minus commissions and fees when filled. There’s a number of ways to go here per your needs and I am here to discuss them all.

July 2020 beans/Nov 20 beans. Have an order working to sell the July 2020 11.00 put and buy the 10.00 put for a collection of 85 cents. We settled today at 77 cents. We need a pullback to get filled at our price. Max loss is 1.00 so I wouldn’t take more than a 12 cent loss on this one depending on the fill. In my view use a stop. 10.82 then 11.00 will be prime targets should we get a weather rally. Which if it happens, would simply allow us to buy back this spread cheaper minus commissions and fees. The new crop Nov 20 beans may have more volatility in the long run especially if this years crop is drawn down to 350 million bushels regarding ending stocks in subsequent reports. However the Nov 20 1100/1000 put spread settled at 73 today. Work to sell at 80 with a 12 cent stop loss. Once could use that collection for a myriad of speculative trades that double up to the long side or for put protection.

Corn- March 20 it can be a little more trickier as corn will have a few volatile days then return to a two-sided, tight ranged, volatility squeeze/slumber. I’m betting we don’t stay at 4.00 that much longer on the March 2020 contract. In fact, I would wager that we see a 30 cent move one way or the other sooner than later. Buy the Dec 19 380 put for 4 cents. Finance that by selling the March 2020 450/400 put spread for a 40 cent collection, minus commissions and fees.Stop loss at 48. I think once harvest progresses and we get a more accurate read on the crop, lower potential production could result in higher prices. Just my opinion.

The trade I really like is the Dec 2020 5.00/4.00 put spread. Sell that spread at 78 to 80 cents. It settled at 75 cents today. Stop loss at 92. Use that 3800 to 4 K collection and either sit with it or buy cheap puts and calls out to May/July. If we rally, 4.68 this years high will be the target in my opinion. If that gets taken out, its 4.91 and then 5.16. Make no mistake though we can easily break as well. I’m not saying we cant. In my view crop losses are a certainty given the aforementioned problems this growing season. I just don’t know when they are going to show up. Which is probably why, I would bet as far out as you can in corn, Dec 20 corn maybe the most advantageous for a long term trade.

Call or email me at anytime with questions and comments. I hold a weekly grain and livestock webinar every Thursday at 3 pm Central. Its free and a signup link will be sent to your email by clicking below. We discuss supply, demand, weather, and the charts along with trade ideas similar to the ones below.