Grain Spreads:Deal or No Deal

Sean LuskGeneral Commentary

As expected, Hawkish comments from USTR Lighthizer occurred thisweek in his testimony to the House Ways & Means Committee. The US Trade Representative head stated that its too early to predict the outcome of the US/China trade talks. However, significant progress has been scored. Moreover, China cannot “buy off” the US with massive amounts of US soybean purchases. In my view, I believe future purchases have been agreed upon. The specifics as to what commodities, how much, and duration of purchases being the questions? Its the intellectual property theft and enforcement issues that seem to be far apart. Again my opinions. The fact that Lighthizer and others keep mentioning that having China buy US AG/Livestock and Energy as not good enough for a deal tells me that the purchase portions of the deal have been secured. Also, it is probably China that wants to keep specifics tight lipped as to not rally prices ahead of future shipments. Again its my conspiracy theory here.

I’m looking at corn and looking long term. Any Chinese purchase made that cuts ending stocks ahead of growing season to me is friendly for price. Any weather event for Brazil’s secondary corn crop or in Argentina would be friendly as well. However corn has been weak with lower highs on the charts. Managed funds flipped from long to short in early February and are adding more on each rally. Eventually they will cover these shorts in my opinion but it maybe longer than expected. One spread worth paying attention to is the Dec19/Dec20 corn spread. Currently this spread sits at a 14.2 cent carry (Dec20 over). I’m looking to scale down buying at 15 to 18 cents lower. (See Chart). I don’t see this spread getting routed until we have a better idea on planting and growing season crop conditions in June and July. If the spread trades past 25 cents Dec 19 under, I would exit. Buying this spread near 18 under would be worth a shot in my view assuming it trades there. Adverse weather in the Northern Hemisphere combined with Chinese purchases could rally this spread from a carry to an inversion.

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