Grain Spreads

Sean Lusk General Commentary Leave a Comment

Soy Complex

Despite a bearish WASDE report Thursday from the USDA that showed a rise in soybean ending stocks by 60 million bushels, beans remain resilient. The rise in ending stocks is a direct result of a cut in exports by the USDA as China continues to shun the US favoring Brazilian bean cargoes instead. However strength in soy meal led by commercial buying remains active as the fear of further declines in Argentina’s bean and corn crops have kept a small weather premium intact into the weekend. Central and Southern Argentinean growing areas do receive spotty rains into this weekend and the  6 to 10 day, but the trade fears a return to drought like conditions soon thereafter. Our old crop new crop bean and meal spreads that we have been suggesting entering into on dips have seen small pushes to the upside. July/Dec meal has been the leader as it pushed from 1.0 over to 6.40 over. Our near term target sits up at 11.0 over. This market will have more upside should weather remain a threat. Argentina is the world’s number one soy meal crusher and exporter, so continued issues there and you will see continued commercial buying in my view. I wouldn’t discount a futures move to 3.67 basis March meal on weather worries which would push old crop/new crop meal and soy spreads higher.

Corn/Wheat

After another new high was achieved in March corn this week at our target at the .382 retracement (level 367) from the 335 low last year. Corn pulled back today as producer pressure and profit taking set in. Corn has made a nice run here from the 345.4 mid January low and those who took our suggestion buying the 380 July call while selling the 360 July put for even money have been rewarded so far. We have shied away from calendar spreads in corn and have been playing it against beans and all wheat classes the last few months. I have preferred a bullish options strategy in corn longer term as funds pushed out to a record short in early January. Managed money has covered near 2/3 thirds of their 230K short positions on the move higher in my opinion . As a hedge against, we have been buying wheat against corn. Favoring wheat over corn has worked as drought in the western winter wheat belt continues. We did see some pullbacks in these spreads as funds took profits ahead of yesterdays crop report while the wildness in equities has prompted profit taking throughout many asset classes and sectors. Should needed rains enter into the western wheat belt, look to sell wheat vs corn as the spread will narrow from 87 over to 76 over. If spot Chicago wheat settles below 446, I would sell wheat vs corn. KC wheat basis march needs to hold 454-55. KC wheat vs corn pushed out to 119 over corn as KC wheat led the wheat sector to the upside. This spread has rallied 48 cents since Jan 24th before giving back 15 cents the last two sessions. If KC works lower early next week look for this spread to trade back down to 90 cents over from 104 late this week. Those who took our recommendation of buying March Minneapolis vs selling KC at 1.29, should adjust their stop-loss at 1.26. The spread has pushed up near 1.40 gaining 11 cents from entry.

One trade we are considering is buying a calendar spread in Minneapolis wheat. July/Sep 18 at a 5 to 6 cent carry. Stop loss at 11 under. Last year it rallied over 90 cents due to spring wheat issues and drought like conditions. Good risk to reward in my view. Email or call me if you want to take a look. 888 391 7894 or slusk@walshtrading.com. We offer a free marketing plan for grain and livestock producers. I can email you charts for all the aforementioned spreads and with levels to consider.

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