Grain Spreads

Sean LuskGeneral Commentary

Pre-report positioning has been the theme this week as funds unwind long positions in corn soybeans, and soy-meal. The same can be said in my view for wheat as funds long KC unwind while they re-short the Chicago contract. As of May 1st funds were long 177 K of beans and 133 K of meal. As these funds have some profit they also have the risk coming into tomorrows supply/demand  report from the USDA. Therefore some liquidation has taken place into the report. Corn has some fund and speculative length as well and its sizable. Like beans some profits were had and liquidation that sent July Corn just below the 4.00 level briefly from 4.08. Corn’s planting numbers looked a whole lot better given the planting progress in much of the Midwest. However there is one problem area that could turn into a problem and that lies in the north. Both Dakotas, Minnesota, Wisconsin, Michigan, and Ohio lag behind in planting progress and it could remain that way for awhile as many areas of the Midwest will continue to see some sort of precipitation into the 21st in the 8 to 14 day forecasts. Further delays bring question marks and worry which could keep this market bid. Secondly, the market will be eyeing new crop ending stocks for 18/19. Average trade guesses for the new crop year come in at 1.63 billion versus 2.17 billion bushels currently. Watch this number and the 18/19 world ending stock number at 183 million metric tons vs 197.3 currently. There’s a potential story here down the road should the USDA be more aggressive with ending stock projections especially any sizable decreases. Wheat production will be under scrutiny as well concerning ending stocks with the market most likely focused on KC winter wheat production. Everybody knows its bad, but how bad and what will ending stocks look like in the new crop year post June 1?

For Soybeans, continue to watch meal. Two weeks prior we advocated buying the July 18/Dec 18 Meal spread from 3.0 to 4.0 July over Dec. July meal settled at weekly support at 385 today while July/Dec meal sits at 8.0 over. With Argentina down almost 25 million metric tons of beans, commercial or end users short bought meal could re-emerge as active buyers. If meal holds look to buy the spread with a stop loss at 2.5 over. We could easily move to 14-15 handles July over Dec as commercial buying could re-emerge. July/Nov beans has fallen apart as the spread has moved to a 8.4 cent carry from a 9 cent inversion early last week. Ouch! Again, in my opinion if you take a shot to buy July and sell Nov, do so with caution with a tight stop. If meal moves higher I think this old crop/new crop bean spread can trade back near parity in the next three to four sessions.

Wheat/Corn…Report day plays only here. For Corn, look at buying the June corn 410 call while buying the June 395 put for 6 cents OB. Risk the strangle to 3 cents, take profits at 15 cents. For wheat, use KC options. Buy the June 495 put and at the same time buy the 560 call for 6.2 cents. If filled sell the spread at 22 and risk or put a stop loss at 3 cents. These are report day volatility plays buying option premium and reducing risk. Tight stops amid small bets here. We are looking at sizable moves into the weekend.

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